Hey guys.. time to ramble about another field I enjoy lol
It is an investment "theory" I guess you could say that I have chatted with a retired stock broker and a co worker who has been trading for a long time, to vet a little bit. Also if you look up draw bridge finance on youtube he sort of touches on it, but misses the mark a bit. Any rate here it goes...
RRSP are essentially evil or neutral at best for wealth building, but "ok" for retirement planning.
Point 1; tax brackets rarely change in any serious way pre and post retirement due to A) rising tax rates and B) retirees are used to certain level of income so they maintain it.
Point 2; the tax you save in your wealth building years, is off set and turned negative due to the tax you pay upon withdrawl.
So the two major scenarios are A) wealth building and B) retirement. I used an arbitrary model with the same controls (I just wanted one account to hit one million wether the returns are realistic or not is not important to the argument lol), the controls were $3,000/mo invested out of income, rrsp model gets $949.67/mo extra as a dollar cost averaging addition due to income tax break and if pension exists it was placed as 50% of best 5 years. I assumed the subject made $100,000 per annum and in retirement wished to maintain that. I also used a hybrid model assuming you only put in enough money to drop out of the highest tax bracket and adjusted rrsp contributions accordingly.
So the accounts ended up the NRSP having $779,918 the RRSP plan having $1,026,806 and a TFSA, RRSP and NRSP hybrid had $854,574. So dollar wise the RRSP by far had the most amount of monies but once you factor in the tax you pay upon withdrawl it only had $132,367 excess, whereas the NRSP had an excess of $172,412. The hybrid model just slightly eeked out the NRSP model but I lost the numbers on that one.. Any rate it barely took the lead by a negligible margin if I recall correctly. Now I considered this to be my wealth building model and excluded the pension, so my next model i did just to meet retirement minimums (variances were tighter of course due to pension).
Hybrid model contributions of $17,606 out of pocket or $14,159.9 if using rrsp kickback. This model ends up paying $4017.98 taxes per year and needs $357,471 for the fellow to retire.
NRSP Model contributions of $15,554/yr, no taxes paid and needs $315,806 for the fellow to retire.
And lastly the RRSP model needs contributions of $20,925 out of pocket or $14,193 if using rrsp kick backs, pays $10,516.08 in taxes a year and needs $424,854 to retire.
So if we rank due to out of pocket expenses the hybrid comes in first only needing $14,159.9, then the RRSP model at $14,193 and then the NRSP model at $15,554. But due to no financial advisor should be telling you to only invest the minimum to retire the differences between the RRSP model and NRSP model become far closer say akin to the wealth building model.. the say $1,400 difference per year realistically only being just over $100 I feel I can safely say most would throw the extra in but this is an academic debate there lol
My feeling is people should drop the misplaced emphasis on the RRSP and adopt a Hybrid investing approach due to A) the dollar sign you need to meet is less and therefore psychologically easier to obtain, B) you want to live life and by maximizing your dollars being put to work you can live easier now and later and lastly.. it's always safer to have more just in case xyz happens.
Now admitted flaws that I did not account for 1) forgot to calculate taxable gains 2) medical expenses in retirement reducing taxable income and 3) I am not a tax or investment advisor so I could have missed things.. But this is simply an exercise I had fun with.. Any opinions or criticism?
Posting here because I know a lot of you have pensions and because I am interested in what you guys read into it.
Abdullah
Ps it's that time of year
It is an investment "theory" I guess you could say that I have chatted with a retired stock broker and a co worker who has been trading for a long time, to vet a little bit. Also if you look up draw bridge finance on youtube he sort of touches on it, but misses the mark a bit. Any rate here it goes...
RRSP are essentially evil or neutral at best for wealth building, but "ok" for retirement planning.
Point 1; tax brackets rarely change in any serious way pre and post retirement due to A) rising tax rates and B) retirees are used to certain level of income so they maintain it.
Point 2; the tax you save in your wealth building years, is off set and turned negative due to the tax you pay upon withdrawl.
So the two major scenarios are A) wealth building and B) retirement. I used an arbitrary model with the same controls (I just wanted one account to hit one million wether the returns are realistic or not is not important to the argument lol), the controls were $3,000/mo invested out of income, rrsp model gets $949.67/mo extra as a dollar cost averaging addition due to income tax break and if pension exists it was placed as 50% of best 5 years. I assumed the subject made $100,000 per annum and in retirement wished to maintain that. I also used a hybrid model assuming you only put in enough money to drop out of the highest tax bracket and adjusted rrsp contributions accordingly.
So the accounts ended up the NRSP having $779,918 the RRSP plan having $1,026,806 and a TFSA, RRSP and NRSP hybrid had $854,574. So dollar wise the RRSP by far had the most amount of monies but once you factor in the tax you pay upon withdrawl it only had $132,367 excess, whereas the NRSP had an excess of $172,412. The hybrid model just slightly eeked out the NRSP model but I lost the numbers on that one.. Any rate it barely took the lead by a negligible margin if I recall correctly. Now I considered this to be my wealth building model and excluded the pension, so my next model i did just to meet retirement minimums (variances were tighter of course due to pension).
Hybrid model contributions of $17,606 out of pocket or $14,159.9 if using rrsp kickback. This model ends up paying $4017.98 taxes per year and needs $357,471 for the fellow to retire.
NRSP Model contributions of $15,554/yr, no taxes paid and needs $315,806 for the fellow to retire.
And lastly the RRSP model needs contributions of $20,925 out of pocket or $14,193 if using rrsp kick backs, pays $10,516.08 in taxes a year and needs $424,854 to retire.
So if we rank due to out of pocket expenses the hybrid comes in first only needing $14,159.9, then the RRSP model at $14,193 and then the NRSP model at $15,554. But due to no financial advisor should be telling you to only invest the minimum to retire the differences between the RRSP model and NRSP model become far closer say akin to the wealth building model.. the say $1,400 difference per year realistically only being just over $100 I feel I can safely say most would throw the extra in but this is an academic debate there lol
My feeling is people should drop the misplaced emphasis on the RRSP and adopt a Hybrid investing approach due to A) the dollar sign you need to meet is less and therefore psychologically easier to obtain, B) you want to live life and by maximizing your dollars being put to work you can live easier now and later and lastly.. it's always safer to have more just in case xyz happens.
Now admitted flaws that I did not account for 1) forgot to calculate taxable gains 2) medical expenses in retirement reducing taxable income and 3) I am not a tax or investment advisor so I could have missed things.. But this is simply an exercise I had fun with.. Any opinions or criticism?
Posting here because I know a lot of you have pensions and because I am interested in what you guys read into it.
Abdullah
Ps it's that time of year