Mar 212016

Retirement Account – Taxation

Many folks should use tax deferred programs such as the RRSP or 401(k). Contributions made into a retirement account is tax-deductible and can grow tax-free in the account. When it is eventually withdrawn and taxed the plan holder will likely be in a lower income tax bracket. I would personally try to keep investments that produce mostly capital gains or eligible Canadian dividends out of my RRSP. But that’s just my personal preference for tax efficiency. The picture in this link here definitely says otherwise.

Most people expect to be in a lower tax bracket when they retire so contributing money into an RRSP to defer taxation to a later date when their tax rate is lower makes sense. But some experts say it’s probably not a good idea to use RRSPs if we expect to retire in either the same or a higher tax bracket as we are in now. However, there might be another way to look at it. 😀


What if it’s still smarter to contribute to an RRSP today even if our marginal tax rate will be higher in retirement? When we make a tax deductible contribution to our RRSP today, the immediate tax relief we get is based on our marginal tax rate. So if our marginal tax rate is 30%, then we would receive $300 by contributing $1,000 to a registered retirement account. But when we withdraw money from this RRSP (or RRIF,) the money we take out is only taxed at our average tax rate, not the marginal tax rate. For example, if we request 12 monthly withdrawals a year from our retirement account then these payments would be taxed similarly to receiving work income from a job where each payment reflects our average income tax rate.

This is due to our progressive income tax system. In Ontario for example, the first $45K of income is taxed at roughly 21%, then the next $28K of income is taxed at 30%, and so on. So if we make $100,000, then we actually pay about $26,000 of income tax, which makes our average tax rate 26%, even though our marginal tax rate would be 38%.

So I’m going to continue maxing out my RRSP contributions each year even if there’s a chance my income will be higher in my 60s and 70s than it is now. 🙂

Random Useless Fact:

Some people on the internet can’t figure out how many girls are in this picture.



Mar 172016

Start Compounding As Early As Possible

I recently came across a retirement guide made by J.P. Morgan Asset Management. It includes a nifty comparison between those who starts investing earlier vs later. The results show how time can play a significant part when it comes to compound returns. 🙂

JPMorgan shows outcomes for 4 hypothetical investors who each invests $10,000 a year at a 6.5% annual rate of return over different periods of their lives:

  • Chloe invests for her entire career of 40 years, from age 25 to 65.
  • Lyla starts 10 years later, investing 30 years from 35 to 65.
  • Quincy starts to invest early but stops after 10 years, contributing from 25 to 35.
  • Noah saves for 40 years like Chloe from 25 to 65, but instead of being moderately aggressive he simply holds cash, term deposits, GICs or CDs, etc and receives a 2.25% average annual return.


Let’s break down the results.

  • Chloe begins investing early, plus she’s consistent, which is why she has nearly $1.9 million at retirement. 😀
  • Even though Lyla started just 10 years later than Chloe, she only ends up with $920K, which means postponing investing for just 10 years while we’re young will cost us almost a million dollars once we’re old.
  • Quincy, who invests for only 10 years, still ends up with $951K at retirement, which is surprisingly more than Lyla’s portfolio, even though Lyla spends 30 years investing.
  • Finally Noah, who has a lower risk tolerance than the others, ends up with only $652K at retirement even though he contributed for 40 years.

Of course no one can guarantee a 6.5% annual return. The chart is for illustrative purposes only and does not represent a real life investment plan. It simply demonstrates how annual rates of return and the passage of time can effect the outcome of a retirement portfolio. The earlier we start investing, the better. 🙂 But just for fun, here’s a look at how the following asset classes performed over the past 10 years.

  • Canadian Equities – 3% annual return
  • U.S. Equities – 6%
  • Fixed Income – 5%
  • Canadian Real Estate – 12%
  • U.S Real Estate – 3%
  • Gold – 9%
  • Farmland – 12%

Depending on our asset allocation it’s possible to have made 6.5% annual returns with a moderately aggressive portfolio over the past 10 years.

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Aug 052015

The Easiest way to Plan for Retirement

Some people say the money is no better when we retire, but the hours are! But how much money is enough to retire on? Retirement planning can sometimes be difficult if we don’t know where to start, or how much to save.


So today I’d like to simplify the process and break it down into two commonly asked questions. Answering both these questions will determine if you are either on the right track to retirement or falling behind. You can use the handy retirement calculator further down the post to find out. Let’s start with the first question.

How Much Money Do I Need To Retire?

Assuming you’ll retire at age 65, here is the formula to figure out how much money you will roughly need to have saved up by the start of your retirement. By “money,” I mean investable assets which include your retirement accounts, investment properties, stock portfolio, annuities, etc.

 [1.019 ^ Number of years left until retirement] x [25 x (Current Annual Expenses – $14,000)] = Total Savings Needed to Retire

So for example, imaginary Laura is 40 years old and spends $30,000 a year. She wants to find out how big her investment portfolio will need to be when she eventually stops working 25 years from now.

[ 1.019 25 ] x [25 x ($30,000 – $14,000)] = $640,345

Using the formula Laura would need to have $640,346 saved up by 65 years old to retire. For couples and families, simply use the total annual household expense and replace the $14,000 figure with $25,000 instead.

This brings us to the second common question everyone wants to know:

How Much Money Should I Be Saving Each Year?

Laura has amassed an investment portfolio worth $100,000 so far. She currently saves $5,000 a year by making automatic contributions to her retirement account, but is it enough? She knows from the first formula that she needs $640,346 to retire by 65. She can use the following formula to calculate how much she needs to actually save per year.

0.05 x (Total Savings Needed to Retire – Current Savings Amount x 1.05 ^ Number of years left until retirement) / ( 1.05 ^ Number of years left until retirement – 1 ) = Suggested Annual Savings Rate 

Alas, it appears saving $5,000 per year is not enough for her since she’ll need to save at least $6,322.

[0.05 x (640,345 – 100,000 x 1.0525 ] / [1.0525-1] = $6,322

Use the following spreadsheet to experiment with your own retirement numbers. 


Download Freedom 35 Blog’s Simple Retirement Income Calculator Excel File. It has both formulas in it. 😉 (Alterative .ods version.)

Laura decides to increase her retirement contributions by $150 every month, bumping her total annual savings to $6,800. It’s important to make these changes early because increased savings will translate directly into decreased spending. If she can live on less money now then she will also require less savings to retire on in the future. Well done, Laura! 😀

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Jun 192015

People retire for different reasons. A skier might retire because he’s going downhill, or an elderly chef could retire because his sage is showing. 😀 But no matter what the circumstances may be we all have to be financially repaired for retirement. This means preparing an adequately sized retirement fund.

But what is retirement savings? Some believe it’s what you have in an 401(k), IRA, or RRSP. But due to the fungible nature of money almost anything can be a part of retirement savings. There’s no need for separation. For me, the definition of a retirement fund is all the financial assets I have at the time when I decide to quit working.

This simplifies life greatly. I don’t have to choose between contributing money to my TFSA or put it towards my RRSP because both vehicles will eventually become part of my retirement fund. The only implication would be for taxes. So retirement savings is more than a 401(k) or a pension. It includes Traditional IRAs, Roth IRAs, SEPs, savings accounts, mutual funds, stocks, and annuities. This gives us a more complete picture of what we have instead of just what’s in our registered retirement savings plan. 🙂

The financial world is constantly changing and retirement is part of it. A few decades ago the retirement plan for most people was based on 3 supporting legs; work pension, personal savings, and government pension such as social security.


Fast forward to 2015 and the grim reality for most workers now is we can’t count on generous work pensions anymore. A defined benefit pension plan is as rare as a Canadian who doesn’t watch hockey. With only 2 legs to stand on the retirement stool will become very unstable. The job participation rate is at decade lows. Many jobs are either going overseas or being replaced by automation. Who knows what kind of new retirement challenges our children’s generation of workers will face?

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