Out With RRSPs???

Based on Paul Martin's plans for the 'Senior's Benefits' plan I have become leery on continuing with RRSP's.

Non-savers will be given $25,500 annually while we savers may be 'clawed back' to as little as $2150/yr. it appears we may be better off letting 'Big Daddy' look after us all.

It goes against the grain to spend and enjoy rather than plan and save, but in the end your lifestyle may be the same. For myself I have maxed my RRSP to date, but have also leveraged into a variety of funds (primarily US/European equity, dividend, small and large cap funds).

Based on Martin's moves I just don't trust the government to leave my RRSP's alone. Too big and too tempting a pot. After his slick moves with unemployment insurance funds, I have lost faith in Mr. Martin - he looks at our money, and sees it as his money.

I too am leery about investing any more in rrsp's until I here more about this senior's benefit. It just sickens me too think that because I scraped and clawed to max out my rrsp's and in the process gave up many things so my retirement could be one that was free of any money worries. There is something in there about what you make as a couple instead of individualy another words family income. Millionaire Paul Martin seems to forget about how some people have to sacrifice to buy these rrsp's.

Benview - you are so right as you said "Paul Martin looks at OUR money and sees it as HIS".

Anybody have a link or article to detail Martin's Senior's Benefits plan and how it will treat those with RRSP money vs. those without?

I find it almost impossible to believe even the federal Liberal Party would stoop to this.

Check

In the last budget, Paul Martin announced that the "proposed" Senior's Benefit was being reviewed, and that revisions would be announced in a few months. This was apparently in response to the negative feedback about the draconian terms of the original proposal from groups like CARP.

Come to think of it, "a few months" have now passed. Anyone know where Martin's revisions are?

Alberta-Jon,

If anything, the various threads on the "In-or-Out" question have served to underscore that there are benefits (and costs) in both approaches. IMHO when in doubt, one should always diversify. In this case that means a combination of both RRSP and non-RRSP holdings.

Also it seems to me that most Canadians fail to invest anywhere near enough for their retirement. Any program or incentive that encourages them to put away more is apt to benefit both them and society in general, in the long run. (Yes I'm being an optimist.)

I agree with above statement about lack of savings on the part of many Canadians. Until that part is addressed, the question of in or out of RRSPs is a moot point. Once you have the savings built up, then the issue needs to be addressed by any affected.

If you are in the enviable position of having substantial savings in both, then you have developed another level of diversification that will sort of limit some of the risks your money will be subject to over the next however many years.

For myself, I figure that there will still be many more governments, and therefore changes to the withdrawal taxes, and implementation of the senior's benefit. I'm much too far away to make changes based on a proposed piece of legislation that is under sooooo much attack.

BL (Hey Paul M. get with the parade, and reduce the EI premiums. If it was a bank thinking about such action, you'ld have them in court explaining their actions.)

From what I know, I believe RRSP's are one of the most generous retirement savings plans in the world. I think they are great and max out every year.

I never want to be dependent on anyone, least of all the government to fund my retirement. To me, those who don't save in an RRSP because of clawback rules are seriously misguided. When are people going to start taking responsibility for themselves.

Those who have little savings and none in an RRSP might think they are getting a windfall come retirement, but they will be sadly dissapointed. All they are shooting for is a very low "standard of living" economically speaking. This seems to be a sad situation to me. Heck why not spend everything you have stop working and go on welfare. Who in their right mind would want to be on walefare. Those who think they are getting a free lunch are just becoming dependent. Why would anyone wnat to live like this??

I for one would like to achieve the goal of never receiving a cent from the government (walefare, EI, or seniors benefit). I would much rather be a net contributor than a net gainer from the societal pot. If I can build a portfolio of a size enough not to receive any seniors benefit I would be quite happy. Sounds like not too many people think this way.

I would hazard a guess that those who complain the most about taxes, the seniors benefit, etc. do the least tax planning or financial planning, but probably will end up receiving the seniors benefit.

Dave N

Dave N, none of us want to be dependent on the Govt, but we do want to collect our CPP which we paid for with our premiums.

I too do not trust RRSPs because the Govt changes the rules all too often. There have even been rumors of an RRSP asset tax, say 1% of total assets. This tax would be crushing blow if you had a few good years in stocks.

The proposed Seniors Benefit will force people to invent all manner of nefarious schemes so they can collect the CPP. I read a scheme in my local rag that suggested 'gifting' money to a trusted person (eg your kids?!) before retiring and getting them to 'gift' it back during retirement.
Therefore, it is not counted as income and the CPP could be collected.

I have considered slowly collapsing my RRSP to pay the interest on my investment loan, so that
the tax liability for RRSP withdrawal will be offset by the loan-interest deduction. Its scary when the govt is in control of your money!

... JJ

Alberta-Jon

I think RRSP's are a good deal.

I save for my retirement, using RRSP and non registered investments. I would like to save so much money even my wife couldn't spend it!

Politicians are short term thinkers. I do not follow their financial thinking. The national debt is a good indicator of the their financial performance. The reason politicians do what they are doing is because we, as voters, let them do it.

As voters we need to focus on reducing the personal income tax levels.

The Seniors Benefit is a form of welfare. It encourages individuals not to save and be fully dependent on government handouts. Is that how you wish to spend your retirement years?

Have you forwarded your concerns to your MP?

hello...trying to get on...no lucl

This is not an html posting. I keep getting stopped for posting html and yet I do not do so.Are you out there Librarian? Help?

IMHO, once U max out your RRSP, go for Leveraged Long Term Buy & Hold Equities, mostly foreign.

When U reach mid-50 or so, I think it is better to concentrate on Outside of RRSP.

So U can control the cash flow, not Paul Martin!

Just my 2 cents

Interesting. Support for RRSP is not as deep as I would have first thought. Also interesting we have not heard from any of the reps from big fund families.I too would be very curious to know what impact the proposed senior's benefit will have on taxes and withdrawl schedules from RRSP.I am surprised that the news industry hasn't picked up on the story that emerges in this forum: RRSP's are not necessarily the best or only investment vehicle for Canadians saving for retirement. Very, very different story from the one we hear every RRSP season. Hmm.mmmWhat about the average investor? Should he/she invest in or out or both? Is there a consensus? Need to hear more from those who sell investing in RRSP's me thinks.What about it? Any "official" voices care to take up the cause of investing in RRSP's?

jemmsoft, the proposed Seniors Benefit has nothing to do with CPP. It is about combining the Old Age Security and the Guaranteed Income Supplement. It is also about clawing the Benefit back from those families above an income threshold.

The CARP news has a new story about this that may enlighten.

The OAS and the GIS is not at all related to the CPP based on the proposed changes. The factor which affects the OAS and the GIS is that it will be based on family income. Where this becomes unfavourable is when one individual out of the family unit will generate the majority of the combined retirement income. Under the old rules of the OAS clawback the lower income spouse was still able to receive the maximum income just based on her own income provided it was low enough it was not affected by the higher income spouse even if he was surpassing the clawback which reduced his OAS payments to $0.00.

I did some calculations comparing both the old rules and the new rules and a family unit in which one spouse would of generated a $40,400.00 income and the other spouse a $28,000.00 income. Under the new rules this family unit would receive approximately $6000.00 less than under the old rules using the clawback. The actual amount is actually higher than $6000.00

These calculations were based on present value values and was looking at retirement in 15 years at a 3% inflation rate and the OAS clawback was not increased from the $53215.00 value as it is indexed only after a 3% inflation.

Therefore the benefit of splitting income is reduced as to the proposed changes for OAS and GIS, it is still however advantageous to split income for tax reasons. Also if I remenber correctly is that the amount you receive from OAS and GIS under the new rules is not considered taxable income.

It just shows that the government will use family income where it is to there benefit and yet will still not allow this splitting where there is only a one income family. I would call this gouging and it will hurt all of us who are willing to take control of our own future and save money for our retirement.

To David N. I'm afraid you missed my point regarding the 'Senior's Benefit' plan. My understanding is that the plan will replace what would have been the Canada Pension Plan. I too do not want the government to look after me in my dotage. However, the Canada Pension Plan was introduced as a forced savings plan, because the government in its' wisdom did not trust us childlike citizens to look out for our own best interests. The money I have sent to them for the last twenty five years was intended and promised to be returned to me beginning at age 65. I was not told in 1965/75/85 or even 1995 that if I was reasonably careful and successful, and if I put away money for my old age that my CPP money would be 'clawed back' to be distributed to those who did not save. It is an issue of honesty and fairness, not of whether I 'need' the money. They did not give me the option of investing this money as I choose for my own benefit - it is a blatant money grab, nothing more, nothing less.

Mr. Martin has also 'grabbed' $15,000,000,00 (billion) dollars through Employment Insurance Premiums. This money is not sitting in a safety deposit box waiting to be drawn on by unemployed workers - it has gone straight to general revenue. This allows Martin to look like a brilliant Finance Minister, paying down the National Debt! And he is doing it on the backs of both employers and employees in a very dishonest fashion. Do you really want to trust your sunset years to people like this?

The following is an Opinion piece I wrote for a local paper. Any feedback? Am I being to harsh?

Making An Enemy Of The State

It is time we retool our socialized tax system. As it stands, Canadian and British Columbia governments deliberately discourage and penalize success, even while rewarding and encouraging failure. Men and women with ideas, courage, determination, and drive are becoming ever less willing to carry on. Businesses are not started when they could be. Businesses are closing when they should not be. And employment is lost where it is so badly needed.

A tax system can work in only one of two ways. Through cooperation, whereby the taxpayer recognizes the value of the taxes paid and believes that the tax system is applied to all in a fair and equitable way. Or through coercion, with taxes taken under duress and without concern for fairness and reason. When the latter system is applied, the cooperation and trust of the population is lost. Honest citizens begin to feel that their government is their enemy rather than their ally. And this is when an underground economy starts to form and taxpayers begin to feel justified in avoiding paying taxes.

The incentive to work harder, to be more creative and to build a business is lost when we are forced to act simply as a ‘middle man' for the many tax collectors. Increasingly, the dollars that arrive through the front door - generated by the ideas, products and services of business people, simply pass on to the hands of governments. And from government those dollars flow too freely into the pockets of far too many with their hands out - many of whom I am no longer prepared to support.

And while those who make their living from ‘poverty industry' will immediately cry out about my lack of sensitivity, my callousness and cruelty, I'll tell you that I'm not prepared to wear that label any longer. I must and will always support those less fortunate people who despite their best efforts, or for whom unforeseen problems arise, need temporary assistance. Nevertheless, there are far too many who are stealing from me and my family by making choices I don't want to pay for.

If you're receiving Social Assistance, are able bodied and young or middle aged - I don't want to support you. If you receive Social Assistance and smoke - I don't want to pay for your cigarettes. If you receive Social Assistance and drink - I don't want to buy your drinks. If you receive Social Assistance and buy drugs - I don't want to pay for drugs or needles. If you receive Social Assistance and eat out in restaurants - I don't want to pay for your dinner while I eat at home. If you receive Social Assistance and become pregnant - I don't want to pay for a child's upbringing that you cannot afford. If you're picking up a Social Assitance cheque and buying a lottery ticket, I don't want to finance your dreams of easy money. If you collect Social Assistance and aren't out looking for work every day - I don't want to support you. In other words, if your personal circumstances are a result of your own bad choices and personal lack of discipline, I don't want to be held responsible for them.

And there are many others for whom I don't want to pay. Like the tens of thousands who choose not to save for retirement, knowing the government will look after their needs. Far too many want the finer things in life, or would rather indulge in expensive ‘habits' such as cigarettes or booze. And they are relying on the ‘government' (read taxpayers) to look after them tomorrow. Let me give an example. My wife's aunt was a careful and frugal woman who lived in an attractive senior's low-rise. Because she had saved and had a little money, she paid fully for her rent. Meanwhile, her next door neighbor - having no money due to a life long indulgence in cigarettes, alcohol and certain ‘charity games,' was considered a victim of poverty. She enjoyed the same accommodations, courtesy of us the tax payer. Penalize success and reward the failure.

Some economists are now suggesting you are a fool if you put your money into RRSP's. Spend the money today, because you'll not enjoy the benefits tomorrow. Under the ‘Senior's Benefits' program currently contemplated by Paul Martin, everyone will receive $25,500/yr. Unless you were foolish enough to be a saver. If you were dumb enough to put away money for your retirement, the government will ‘claw back' up to $22,500. The spendthrift will be given $2125.00 a month while you, the saver, will receive $208.00. Never mind that the government forced you to pay into the Canada Pension Plan. Forget the promise it would be returned to you in retirement, that it was being held in trust for you. How then can we trust the government?

I don't want to pay for retired politician's who return to head government commissions while receiving gold plated pensions. I don't want unsuccessful politicians acting as consultants to health boards, sucking up more of my hard earned money. I don't want to pay $168,000 for someone to count the jobs lost by the same government that hired him. I don't want to pay for bureaucrats who work for government and not for me. I've recently had dealings with both WCB and the B.C. Assessment Authority, and it was clear that the mandate of the employees with whom I dealt was not to act as an advocate on my behalf, but rather to further the aims of the agency from whom they receive their paycheque. I don't want to pay for government employee's who view my earnings simply as a cash cow for their department.

Canada's potential is tremendous. But the state socialist system is the enemy, keeping us from realizing our potential.

When business people cease creating business, when ideas, risk and hard work are unrewarded, Canadians everywhere are the losers. In 1950, the great American novelist Ayn Rand wrote ‘Atlas Shrugged'. In her novel entrepreneurs, industrialists, and factory owners were besieged by what she termed the ‘parasites of society' who constantly demanded more while at the same time vilifying those who provided for them. Eventually the enterprising people who created the businesses and industries had enough. They began closing their plants and shutting down their enterprises. And of course the ‘parasites' then cried out in desperation and anger, complaining that these terrible people had a duty to continue, that they must not be allowed to close their businesses. And they vilified them for shirking their responsibility to a society which could not operate without them. It is now forty eight years later, and sadly, doesn't it sound all too familiar?

benview writes:Some economists are now suggesting you are a fool if you put your money into RRSP's. Spend the money today, because you'll not enjoy the benefits tomorrow. Under the ‘Senior's Benefits' program currently contemplated by Paul Martin, everyone will receive $25,500/yr. Unless you were foolish enough to be a saver. If you were dumb enough to put away money for your retirement, the government will ‘claw back' up to $22,500. The spendthrift will be given $2125.00 a month while you, the saver, will receive $208.00. Never mind that the government forced you to pay into the Canada Pension Plan. Forget the promise it would be returned to you in retirement, that it was being held in trust for you.Is this correct? Would not being in RRSP's help avoid this outcome? Still no answer to the burning question: Should an average investor divide his investments between an RRSP and something outside this instrument? Where are the "official" defenders of RRSP's. Notably quiet. Where do the FP and/or FA's wade in on this issue? Given the media hype and the millions spent on promoting RRSP's, I am amazed that theguru's, sales people, fund folks, etc. are so silent on this issue. I am beginning to think this silence speaks volumes.

I guess for me what is the alternative?

It used to be housing - Paul Martin's generation was able to get a great "TAX FREE" capital gain by buying a house in the pre boom years, and then watch as it appreciated. Now (assuming they haven't already done so) they can sell with no tax payable on the gains.

It seems like those in power are slowly closing all the investment benefits that they took full advantage of. Anyone remember the capital gains exemption. How about the non taxable interest (first $1000 of interest income). And they wonder why we don't trust them - even a LITTLE bit.

I'll still take my chances with the RRSP to shelter interest income, but I really have to weigh the benefit of sheltering equities when the future benefits could come under attack.

I guess what should happen is a totally revamping. Those who contributed to CCP should get their share of the plan. Those who didn't - tough - it's a pension plan. For those who NEED the income support during retirement - call it what it is. RETIREMENT WELFARE. Let people know what they are drawing in black and white. Then come back and see if people would be more likely to save for themselves.

BL

To Alberta-Jon I'd like to say first that I have greatly enjoyed many of your thoughts read in this forum. Secondly, when you suggest that I (we) forget about the government having promised that my own money would be returned to me at retirement, we are fools if we allow them to renege on their 'promise'.

Lets try a slightly different scenario. Lets' say you had If you had put this money into a bank account month after month and year after year. Thirty years later the bank tells you that they have changed their mind - that your money will no longer be available to you and that it will instead be given to their customers who obviously need it more than you do. Would you still be as sanguine about it? Would you still think "oh well, I've still got money in my other bank (RRSPs)"? And would you then trust the bank (government) holding your other money (RRSPs) to pay it back in full when you need it?

I sure don't. If we baby boomers don't let Martin know that his proposal is unacceptable and that we won't stand for it - we are all fools. You can let him and any other MP's know via e-mail quite easily through:

http://www.net-efx.com/faxfeds/

Now, back to your original point. Naturally you are unlikely to hear any contrarian viewpoint from the financial community regarding RRSPs. It is a sin of omission rather than commission - and that is what it is all about - commission sales.

It is far easier to sell the less initiated and educated on the benefits of tax reduction (RRSP) than it is on value appreciation (equities outside RRSPs) and most sales people will take the quickest, easiest route to get that sale. The benefits of non-RRSP investing takes far more time to understand, and seems considerably more risky to new investors. And I believe the tremendous increase in RRSP sales has been to new investors, rather than to 'old hands'.

benview,

You seem to be confused about the differences between the seniors benefit and the Canada Pension Plan (CPP). The Seniors benefit will replace the OAS, GIS, age amount, and pension cerdit. It is basically a social walefare system that gaurantees a minimum income in retirement and is clawed back based on income in retirement.

The CPP is a totally seperate plan that you and your employer contribute to based on employment income. The CPP CANNOT be clawed back no matter how much your income in retirement, and the CPP will not be replaced by the seniors benefit as you seem to think. I'm suprised that you seem to have this fundamental misunderstanding.

The fact is that there has always been a clawback on the GIS/OAS suppliments and the seniors benefit takes care of some of the inequities that were in the old system such as taking into account family income as RGP1 points out. I'm not really sure which side you are on. Would you like the benefits increased or decreased? On the one hand you seem to be complaining that benefits are too high and non savers getting too much but on the other hand you are complaining that they are too low (ie. you will end up getting getting less).

It sounds like from what you have written that you think the benefits are too high and there should be more clawback. In this case you and I would agree. The government has moved to make the individual more responsible for their retirement. I think they should go further in this regard.

Sadly, because of public pressure, Martin is considering increasing benefits for the seniors benefit (by decreasing the clawback), which in my mind will only encourage more not to save and will obviously cost us all more in the long run. It just encourages dependence. I think benefits should be reduced furter (along with tax reductions) so only the most needy get it. Can you clarify your position?

BemusedLURKER

I like the sound of that ..... "Retirement Walefare".

I forgot to say that along with more of a clawback, I think the basic benefit should be reduced so it is really like a Retirement Walefare system.

Dave N.

I bet that many people think that CPP was meant to be rolled into new Senior's Benefit.

Although we are getting somewhat off topic here, I have a question for you (or others): What is the present proposed income threshold before clawbacks take place?

Are you arguing that the Senior's Benefit should be clawed back from those Canadians who had the thrift and foresight to save for retirement? Isn't there some fear that not only will Senior's Benefit be clawed back but this Benefit will also be added to one's saved income and then be further taxed--creating, in effect, a double tax bill? Just wondering.

Gosh folks, I'm still waiting for an "official posting" from "an authentic mutual fund company representative" willing to tell me now and not in yet another RRSP season that RRSP's are the best way to save for retirement. Are there any out there? "Is the truth out there?"

Why do we need OAS anyway. It is a form of welfare and should be administered as such. If the government would quit trying to hide the fact that it is a welfare program, then maybe more people would have a sufficient sense of pride to realize that in whatever manner, they are responsible for themselves. OAS should be only a last alternative when all else has been tried.

Yeah, its harsh, but if it isn't harsh its a freebie that someone else has to pay for. (Yeah, I've heard it before you built this country - well my and succeeding generations will be paying off the bills)

BL (watch em, they're still spending your inheritance)

Alberta-Jon, I do not pretend to represent mutual fund companies, or anyone but myself. I have been a financial planner for more than 15 years now, and my opinions are my own.

My position is that there is much misunderstanding about the proposed Seniors Benefit. I would like to stress "proposed". This is NOT law. It is being discussed and revised.

As Dave N. , RGP-1 and myself have said above, the CPP has absolutely nothing to do with the proposed Seniors Benefit legislation. Nothing!

I understand emotions of contributing to the CPP for years, and expecting a return, but that is a separate issue. Period. No one has said that the CPP will be clawed back.

The reason FPs, FAs, or whoever are not appearing here is that this has been discussed before, many, many times.

I for one am not too interested in repeating myself over and over again on the same issue.

If you want me to say it again I will. RRSP's are still the best vehicle for MOST people to save for their retirement in my opinion. Individual situations may be different. I cannot imagine structuring my retirement plan based on "proposed" legislation that can change with the whim of this or the next government. My retirement plan is based on current legislation, with the outlook that this may change. With that in mind, I max out my RRSP.

Dave N.

I stand corrected (and embarrassed). Having now read an article on just this subject in B.C. Business Magazine, I now recognize that CPP is a different program administratively speaking. But that does not erase the inequities of the system since the whole global system of government income payments will still reward non-savers while punishing savers for their diligence. In fact the people it punishes the most will be our children and grandchildren who will pay most of the bills.

I wholeheartedly agree with BemusedLurker that this is another welfare payment and should be addressed as such, rather than being cloaked in such a warm fuzzy term as 'Senior's Benefit'. Are we saying you deserver this money for simply having achieved a particular age?

According to the tables provided in the article, couples will be paid less per person than individuals both in 'Senior's Benefits' (SB) as well as in the CPP. As part of a couple the SB will be $11,420 well an individual will receive $18,440. For CPP a couple will receive $9,400 as opposed to $14,100 each. While few would do so for emotional reasons, a practical couple would be wise to divorce prior to retirement. And are 'common law' couples to be treated as 'individuals' for purposes of applying the formula?

Some quotes from the article: "To achieve a quite acceptable standard of living, you have to save absolutely nothing."

"First, no senior couple ...needs to work a day to save a dollar to enjoy this lifestyle." Even a married couple straight out of prison is eligible at age 65 to receive Guaranteed Income Supplement, Old Age Security and other Federal and Provincial benefits totalling $20,500."

"A British Columbia retired couple, with no savings at all, will receive from government a total net pension income (after taxes) of $25,140 in the year 2001."

"...a couple which relies on government money (taxpayers money -government doesn't have any -Benview) alone in its retirement will be able to live quite happily, if it is careful and frugal."

According to Actuary Malcolm Hamilton, "I think we're overproviding for seniors and over-taxing working families. Large numbers of working Canadians shouldn't be saving because their standard of living is already guaranteed to be as good in retirement as it is today." The pension system he notes, is set up to take money from those who have saved and give it to those who have not. "Right now everybody gets Old Age Security. Its clawed back through the tax system but at quite a high income. The new system is about clawing it back at a much lower income." In summary, Ottawa is giving Canadians little incentive to save, but a lot of reasons to be confused. "They could make it simple but I think their fear is that, if Canadians understood it, they wouldn't like it."

"Wise couples which have made great efforts to save for their retirement receive little help from the government. Foolish couples which have made no effort at all to save get a guaranteed "comfortable" lifestyle. Perhaps they are not so foolish after all - despite what retirement planners and mutual fund managers say."

Well my face is red - I must profess my ignorance.. I was under the impression that the CPP was going to rolled into the proposed Seniors Benefit and part of a possible clawback.

But I feel better now! I get CPP... yippeeee!!

madelyn,

Thank you for your "semi official" support of RRSP's. No doubt this topic has been kicked around a bit already. But I wonder if this is the only reason why the guru's have been so quiet on this issue. I wonder if embarrassment rather than boredom is stilling their voices. Embarrassment for over selling one way to invest, while underselling, the alternatives to investing in an RRSP.

Whatever the cause of the "official" wall of silence, it will have to be better than boredom. Imagine fund gurus, financial planners and related company being too bored to talk about an issue that almost single handedly defines their business. Whether the elite like it or not for most ordinary investors their RRSP represents their hopes for a secure retirement future. Anything that might bring this hope into question is a burning question for millions of Canadians. It is anything but boring for them!

And the value of investing in RRSP's has been brought into question by many contributors to this forum. I have been watching but not contributing to many of these discusson re. RRSP's and I noted that few official voices were heard. The articulate arguments raised by the critics of RRSP's and the deafening silence from the "official" sources was most telling.

I note that you and many others have spent a lot of time on the issues related to proposed senior's benefit and its impact on our retirement strategy. It is apparent that you agree that the prudent investor has to keep at least one wary eye on what successive governments decide is the right course. Wary, but not paranoid. Good.

As for me, I am frugal, penny pinching investor. I think I will start spending a lot of time watching what the government is up to and what impact it will have on future withdrawl systems. Although, I have maxed out my RRSP contributions for some time now, I am going to start seriously examining whether this is the most prudent way to invest. I plan on spending much time on the merits of investing outside an RRSP. I am going to look more closely at the costs and benefits of leveraged investing.

I think I have bought, maybe too hastily, into the virtues of investing only in an RRSP. Perhaps, some of the bored "officials" will make the effort to once again explain the virtues of investing and maxing out one's RRSP.

Thank you and others for your thoughtful discourse. :--)

just to add insult to injury, how many times have you heard someone over 65 years of age ask for a discount -------at the theatre, hairdresser, grocery store etc.( I even heard one asking for a seniors discount on a lawnmower last week.)

Our children and grandchildren will pay very heavily indeed for that whole generation who built this country but left the bill.

I agree that in its present form, the proposed Seniors Benefit creates a huge disinsentive for Canadians to save for their retirement. As well, it penalizes those savers who have worked hard, sacrificed and saved for their retirement years.

I also believe that including spousal income in the "clawback" calculations, it forces a financial "dependency" which may not exist within a relationship. For example, both my partner and I, maintain separate financial identities (savings, RSP's, investments etc., but contribute jointly to pay household expenses. We are completely independent of each other financially, an arrangement which seems strange to many, but works very well for us. We both feel, it would be grossly unfair, for one of us to be deemed "dependent" on the other, for the purpose of benefits by the government. Of course, we would "support" one another in an instant if it became a necessity, but it seems unfair that the government would force this dependency. It must be very difficult, particularly in a relationship where there is a financial dependency, if the partner without the financial power in the relationship, is being "dominated" by the other partner. This is a problem many women face in our country, a problem that will only be exacerbated by the proposed legislation.

To Alberta-Jon

Here is perhaps the best book I have ever read on investing, and you can get it free on the 'net'. After thoroughly reading and digesting the material, I indeed did decide to become a leveraged investor. Lets hope this link works. If not type the following: http://www.investment-strategies.com/book/index.htm

While not all periods will be like the current one, if you choose carefully and make sure your income can cover any slow growth periods, I think it is the way to go. I use a 'SWP' or systematic withdrawal plan so that the investment gain (hopefully) makes the interest payment with an overall increase in the value of the holdings over and above the costs. And of course your interest is tax deductable! So far I have made 10% over my costs - nice to do using other people's (Canada Trust) money.

Alberta-Jon:

I should have tried that link before giving it out. The man you want is Frank Armstrong: Investment Strategies for the 21st Century. See below, this link does work. I downloaded a chapter at a time, then went off line to print each one. Well worth the time.

Alberta-Jon:

I read with interest your last post. Only one comment struck me, and that was the

"I think I have bought, maybe too hastily, into the virtues of investing only in an RRSP."

It is this single aspect that people need to address.

There are 3 specific cases. 1) saving less than RRSP limit 2) saving to the RRSP limit 3) saving more than the RRSP limit

It is for the first 2 cases that this forum is most pertinent. If you save more than the RRSP limit, you can do appropriate asset mixes, whereby you can set your portfolio mix both in and out of the RRSP such that you make it most tax-efficient, all else being equal. (blecchhh - what a mouth full).

Just by the nature of RRSPs, specifically the fact that they contain a future liability (untaxed income) that is mandated to be withdrawn at a minimum prescribed rate, makes them subject to greater than the normal amount of government interference. Anyone see a pile of bucks that the current finance minister hasn't eyed with great longing? (EI come to mind?)

BL (just remember, they'll have to pay for the gun registry cost overruns from somewhere - another case of financial mismanagement)

On the question of CPP and clawbacks, it is true that the CPP itself will not be clawed back under the present proposal. However, it will still have an effect since it will be considered income and will therefore affect total income and total clawbacks from the Seniors' Benefits.

I agree with Madelyn. No surprise there, though.

I have RRSP's and max. them every year. They are the single best form of savings incentive we have. Tax credit and tax-free growth until withdrawn. That said, I have far more outside of RRSP's than in. Its all part of portfolio diversification. I have advised for some time that people should have at least the same amount in both places. When you are younger, invest in RRSP's first. As you get older, make sure you have a good amount in both.

It is true that you may get hit when you withdraw these RRSP's. But you are still much farther ahead, with the tax credit and the tax free growth than without. If you could earn considerably more outside of RRSP's, then things might change a little, but thats debatable - especially since you can now have 100% foreign content in your RRSP if you really want to.

Here is a crude analysis. Take $5,000 per year. 40% MTR. RRSP return - 10%. Refund re-invested. Non-RRSP return 13%. 25 year time frame. Assume 2% taxable capital gains distributions in non-RRSP account. All equity. (obviously skewed in favor of non-RRSP investments, right)

At the end of the 25 years, the RRSP account is worth 688K or 344K after 50% tax. The non-RRSP account is worth 576K or 360K after 50% tax applied to capital gains.

What this means is that, even with 3% higher growth, non-RRSP investments are hardly blowing anything out of the water. It also means that maybe we should own both.

Now, I really don't know what future legislation will actually bring. I think the proposed Seniors Benefit is political suicide as it currently stands. It is a tax grab and it does punish success. But, at the risk of starting another debate, that has been typically Canadian. Whether it comes to pass is anyones guess. I have two points:

First, as Madelyn said, we have to base our judgements on today. How would you like to find out in 20 years that you COULD have had all those tax breaks along the way without it materially affecting your retirement income. Weigh the clawback against the compounded refund over your retirement savings years. Its not you aren't receiving any benefits today is it?

Second, if you think that $25K is going to cut it in 20 years, think again. If you want to retire in poverty, like so many people do (70% of all retired women live in poverty) then by all means spend today. If you want to live better in retirement, and pay taxes, then save today. AND, you have how many years before you retire to lobby for change? Get on it.

Oh ya, one other thing. You are still going to pay taxes on the non-RRSP stuff when you withdraw the money in retirement. That, too, will affect your clawbacks. The solution is not to stop saving. The solution is to smack the politicians on their heads and say "quit punishing my success". Maybe then we'll see less money flowing offshore.

Geoff,

Thanks for taking the time for posting such a thoughtful reply.

I know being a prudent advisor you would want to know more about my financial situation, etc. etc. But (just so I am really clear on this) as a general rule would you recommend that someone who is in their late forties, who might be working for another decade, who has to this date maxed out RRSP, continue to invest in an RRSP or start from now investing outside the RRSP? This is assuming that, unlike you, they would have to choose between maxing out RRSP or from now on investing outside an RRSP?

Thanks.

benview,

Thanks for reading recommendation. I am planning on camping on the Oregon coast this summer. I think I will use some of this time to catch up on my growing reading list.

Alberta-Jon, thats a tough question. I'll tell you why.

You are in your peak earning years right now, I assume. The tax breaks will be their most valuable. That said, diversify. My general rule is never put all you eggs in one backet. In this case, the RRSP basket could lead to problems just like overweighting one particular asset class or country.

I would consider going into both. Or max. RRSP and open with refund - etc. You have to weigh the options based on your personal situation. Personally, I just couldn't give up on the $2,500 I get back for every $5,000 I put in. That's me. And I hate RevCan and taxes. The way I look at it, I can still manipulate my Income in the future if I have to. I can get my RRSP's out tax free with a simple leveraging strategy if I have to. Of course, I can handle the risk. (most of the time)

I'm sorry I can't give you a more definitive answer, but I don't know anything about the size of your account, your current earnings, your pension status, your net worth, your risk tolerance - etc. For myself, I'm in my 30s and plan on contributing to RRSP's until I no longer have employment income.

Geoff,

Thank you. I wasn't looking for free financial advise, just some general guidelines. This you have provided. Your postings have been very helpful. Thanks, again.

Alberta-jon, and others, RRSP's are Tax Deferral, and if you follow FA's advice and have a Cash Flow of 70% of Pre Retirement earnings, you will be deferring money into Highest Tax bracket.

In early years you will be deferring lower Tax Money into higher Tax Money. PERIOD. FULL STOP. END OF ARGUMENT.

My proposal, is you work your ass off, ignore RRSP's and have a MORTGAGE FREE home..

borrow against the home, and invest in anything you want, and the interest is TAX DEDUCTIBLE..

The Cash Flow is your choice, Capital loss write offs are possible, you are the Captain of your Ship.

If you are unsure about using borrowed money for the investment, then it is not a good investment or you have not done your hoework.

Iam now at the point that i will buy a house again, refinance, and buy back my investments.

i am getting money at 3%, and if i cant make at leats 7%, I don't deserve to be at this site.

Less riskier than taking a mortgae on a house on which you have no idea of future value, but you must get at leats a 7% appreciation to break even.. C'mon team, let's start thinking like Yanks, MORTGAGE INTEREST TAX DEDUCTIBILITY.

Howard has some good advice. I don't think though that responsible FAs are pushing RRSPs on those in the lower tax brackets.

Also, there are many in the top bracket that also have mortgages. For most of them, it still makes sense to contribute to RRSPs, and use the tax savings to pay down the mortgage.

It's just not all black and white.

Hello,

I would have replied earlier but I have been out of town last few days. Thanks Bylo and Madelyn. My reading list and questions continue to grow.

Jane,

I'm not so sure that "responsible" FA's are not pushing RRSP's to people in lower tax brackets. I have been doing an informal survey in my circle of acquaintances and find very few people of any income group not involved or wishing they could be involved with RRSP's.

I know this one young person, married, two children, up to ying-yang in debt who was talked into getting a loan from the bank to max out his RRSP. This loan is to be paid over fifteen years. Does that sound like responsible advise?

Howard,

I don't wish to address you as ScrewOff. It is much too disrespectful. I see where your advise is going. I'm finding much more merit in your assumptions about taxation and freedom of investing and withdrawing than I once did.

To All,

I will continue to explore this issue and at the risk of boing some, I will from time to time return to this discussion. Assuming, that is, that this discussion is over for now.

Jane,

Oops. should have said loan for $15 000.00 must be paid back over five years. Still very bad advise for a couple stretched nearly to their credit limit.

OK, OK, so I'm late into the "fray" here .... better late than never:

First, A-J, many thanks for all your interesting and insightful comments. For the record, I am an FP (albeit a fee-only one, so the comments about selling product and the RRSP are not so front-and-center for me) and I have been in the business for almost 2 decades - personally I max my RRSP as well as doing investments outside the RRSP (see also Bylo's comments on the "in-vs-out" arguments from previous threads).

First, let's be clear on the Seniors Benefit - this is simple grey-fare, or putting it more pointedly, if you are truly setting your financial sights on coming in for your retirement at a level of lifestyle that will qualify you for this particular brand of "poorhouse" then frankly, you justly deserve the results!

Wake up y'all, you'll only get one shot at this game so if you mess up and find that come age 65 you and your spouse/partner can only afford the tea-n-toast version of "financial freedom" you have no-one but yourself to blame and you will certainly have the rest of your "golden years" to throughly regret your lack of planning ..... me, I am planning to be able to retire early, start a second carreer and travel while health permits .... forget the "grey-fare".

This said, the CPP is not part of the proposed grey-fare program, and yes if we as a society are stupid enough to permit the "elected" officials to steal our pension that we have paid into (and so have our employers), I'd be pretty amazed (BTW, has anyone heard the old joke about the definaition of an election: it is a forward market in stolen property ... but I digress ... OK, back on the soapbox).

Yep, make my vote YESSSSSS in favor of RRSPs (beware of MTB of course, and use tax refunds to pay out non deductible debts, etc.).

Remember, with the changes a couple of years ago to the pension adjustment factor (this reduces annual RRSP room), many employees with reasonable pension plans and decent earnings have little if any RRSP room .... OTOH, the new Pension Adjustment Reversal (PAR) proposed in the 1997 budget will help ease this problem (if an employee leaves an employer and has been subject to PA factors that are, in the end, too large compared to the transfer value of their RPP).

The bottom line is, have your RRSP maxed and plan the other investments so that your pension and other assets allow you to leave the RRSP to age 69 when you are forced to RRIF it ..... for those above who say "gee, I don't wanna do anything in an RRSP 'cause the rules might change", I say why get out of bed in the morning and even cross the road, life is full of risks and people get killed every day crossing roads ....... c'mon, take the "RRSP risk", it's a terrific deal today and it would take many changes to make it really poor and I tend to believe that the govt simply cannot afford to NOT HAVE people saving for their retirement .... what, are the echo boomers or gen-X-ers gonna support all the rest of us? Not on your life.

Best of luck with "grey-fare".

Warren.

Warren,

The genesis of this thread is an article by Chevreau in the FP last month wherein it was asserted that it may be prudent for a top marginal tax rate 44 year old individual to cease making the max RRSP contributions after 11 years and invest outside the RRSP for the final 14 years until the RRIF withdrawal commences.

The INside then OUTside individual ends up with more after tax cash in retirement than the INside individual. It would seem that the difference is primarily due to the OAS/Seniors Benefit clawback.

Does T.E. Financial have software to either support or debunk the strategy?

Yesterday's Globe had a great section on this and doea adress all issues.

What will happen to the TSE if martin goes ahead and boomers start pulling their money out in light of Martin's 60's style Liberal Socialism.

The Liberal Party are 30 years behind, they as well as all parties desperately need Youth.

The kids are going to inherit this, why are they not sreaming about this totally unfair and short sighted Vote getting from freeeloaders approach??

Oh yeah, the Gypsies are still collecting Welfare but now the Hungarian Gypsies are heading this way.

Warren,

I disagee with some of your comments,

The self-employed have no other retirement income other than the funds they invest themselves. For many, maximizing their RRSP every year would be enough for a comfortable retirement (if their maximum is high enough). I'm in this situation... my FP and I have determined that maximizing my RRSP will be sufficient to retire comfortably.

However, I think it's folly to put 100% of your retirement nest-egg in the firm grip of the goverment. It just makes common sense to me that I should in fact NOT put 100% of my yearly investments into RRSP and invest some of it outside my RRSP.

Just another form of diversification.

I would appreciate your comments on this.

Hi Warren,

Well no doubt on where you register on the great RRSP debate. Your certaintly mirrored, until recently, my certainty on the wisdom of investing/maxing out my RRSP.

Recently, however, owing in part to the article Michael refers to and various related discussions, I am starting to wonder whether I should continue to max out my RRSP. I am beginning to wonder whether I shouldn't start putting more emphasis on investing outside rather than inside RRSP. I wonder what will be the most advantageous when it comes time to live off my accumulated wealth: "In" or "Out"? I am wondering whether even now--who knows how much worse it will be later--there aren't too many regulations, restrictions on investment decisions and withdrawl strategies.

I still have way more questions than anwers at this time. I still wish I had more definitive evidence on the merits of in or out. I am thankful however for all the help you and others have so unselfishly offered. Thanks.

BTW could anyone provide a link to the article Howard refers to?

Mikale (nice alias) ... no we do not have a specific program to test the premise Jon suggests - I read the article with interest when it first came ... good link for others to follow, thanks.

First, the grey-fare program is not in place yet and while we have clawback of the OAS, the fact is that many folks will be impacted by the clawback just because of pension income and other investment income (at least that is what my projections for my clients show me) ..... others, and the comment above from the self-employed is a good example, will have a different problem.

For the self-employed, I often find that the ultimate sale of the business or moving on to start another small business (hobby) in "retirement" will create an income base that could well bump one up to a level where the clawback occurs.

Jon's though-provoking article is fair enough, but I still like the idea of investing $6750 of the tax money (50% of $13500) for the next 20 years or so ..... what if by then I choose to live outside Canada and can then face only 25% tax on the withdrawals from the RRSP/RRIF (I appreciate, this is a whole other discussion, but if you predicate all your planning on an ever more punitive tax system in the future, where do you think people will go - they will move out of Canada .... hovever, better to ramble on about this on another thread).

Perhaps Gummy or another math giant would care to try to graph a scenario of RRSP (plus tax refund) vs investing aftertax in a taxable environment - I think that in spite of the clawback, the RRSP is still attractive. If other income from pension, sale of business, inherited capital, sale of house, etc is going to be significant, then the clawback will happen anyway.

There is no easy general answer - but, for me I like the RRSP to the max and invest as much as possible outside the plan as well. As the inimitable Mae West said: "ah bin rich and ah bin poor .... rich is better".

Warren.

Sam invests INside an RRSP (Return = 10%/year).
Sally invests OUTside (Return = 11%/year).
Each invests $10K/year.
Their tax rate is 40% while investing.
After umpteen years they give themselves a 20-year annuity
(but now they're in a 50% tax bracket).
Who is better off, in terms of after-tax annual income?

Sally has the advantage if:

1. Her Rate of Return is higher, and/or
2. Their Tax Rate is higher (when they withdraw) and/or
3. The investment period (that's the umpteen years, along the horizontal axis) is larger.

Warren, it was Pearl bailey that made that statement. The only thing Money cannot buy is poverty. FP's say that you need 70% of prior retirement earnings so as far as ia m concerned you will still be paying taxes at the same rate. meanwhile you start contributing at lower Tax levels to get i out at higher tax levels?? No Capiatl Gains Tax Breaks, no Capital losses, 80% stuck in a Non Performing market, canadian dollar, eliminating you from Government benefits.

way too many negatives, and in one foul swoop the government changes the rules and YOU ARE SCREWED.

think about a Canadian public who wake up and start taking their monies out.

SUPPLY OF STOCKS INCREASES. DEMAND DECREASES. ELASTIC SUPPLY. INELASTIC DEMAND. PRICES FALL LIKE A STONE. Makes no differance how good the company is, more sellers than buyers. it is time to exercise judgement, irrational exuberance for RRSP's is fading.

Gummy, thanks for the graph.

Howard, good points but you assume your tax rate will be higher in retirement? Certainly the point about the 70% of preretirement expenses is valid .... I do understand your issues with the "closed system" of RRSP investing, and in the right set of circumstances it may make sense to diversify outside the RRSP system ..... however, for most I am not so sure.

I look at expense levels (lifestyles) to plan retirement - in most cases, the income levels for clients to support the lifestyle will put them over the OAS clawbacks anyway, so the issue becomes moot - consider a couple earning a family income of $100k and spending $60k or so per year - the $45k (approx) of retirement lifestyle will require an income level that will erode OAS anyway (assuming the govt does not do any indexing of the thresholds - we see how much they have loved to de-index things in the last decade or so).

OK, just a few thoughts.

Warren.

Alberta-jon et al. Im an owner of a very small corp and have just spent over an hour with my accountant reviewing available options for retirement. My SDRRSP will remain although no more contributions will ever be made. The small corp owner has much better options than an RRSP for retirement than a wage earner and an RRSP makes no sense whatsoever. Most small corps dont bother as it is a legal hassle/expense and my accountant will benefit too. I have a little understanding of corporate law and this is all perfectly legal. IMHO, anyone having a small business MUST incorporate soas not to share retirement income with Paul Martin and his ilk. Im sure most of the FAs here are aware of the available options.