Welcome to November
Posted by John Draper | Filed under Retirement Planning, This & That
November has never been a very good month for me. With the shortened days and the piles of rain that come together, it’s always been a struggle to make it through. Kinda like February. I’m always wishing I could just get to the end of the month and be done with it. Its far easier to try and wish away the tough times than to actually live through them. But wishes don’t work. It takes guts, and stick-to-it-ness, and stamina to get through. And it takes patience too. So this month, I’m taking my time. This month, I’m resolved to live in the moment. This month, I’m going to make the very most of every minute of every day. I am resolved.
Am I optimistic or is this a case of the hero cheering himself up? I’m honestly not sure. I just know that I need to stay in Presence if I’m going to make it through what will be a Killer November.
As I was showering this morning, I thought to myself, “Self, you haven’t been much fun over the last couple of weeks.” Nope. October was a rollercoaster. And it’s so easy just to stay on the rollercoaster, riding up and down, feeling the pit of your stomach fall out at the next turn. But at some point you have to GET OFF! So, here, on November 1, 2008, I’m getting off.
There were lots of questions from you on Wednesday’s blog and so I’m going to try to answer a few of them and redirect you wherever I can. Here goes.
To Kate who wrote:
But I’d love to see a post on here about the basics of saving for retirement. What is an RRSP? How much should you put away? How often should you put it away? How should you choose an RRSP? What happens if the market tanks? How do the tax benefits of an RRSP work? What’s more important- paying off debt, paying off the mortgage or saving for retirement?
Whew, girl. Slow down. Start by going to the Articles section of the website and clicking on Retirement Isn’t for Sissies! There are 8 articles there that should help clarify what you’re asking about. Start with RRSPs 101. If you still have questions, post again here.
Saver Queen wrote:
Gail, I hear you preach about the importance of socking money away to RRSPs from an early age. But I am confused, because although it reduces the taxes I pay today, I will pay tax on them when I ultimately cash them out. And I’m in a low tax bracket now – and in fact, I have enough roll-over that I won’t be paying any tax this year so my RRSP contribution won’t make a difference. But when I am ready to retire I will quite likely be in a much higher tax bracket. In essence, will I not, in the future, pay tax on earnings that right now are nearly tax-free? Shouldn’t I just use a tax-free savings account or another way to invest my money than RRSPs?
Saver Queen, why would you use up your TFSA room when you could keep that for building an emergency fund? Just because you make a contribution to an RRSP doesn’t mean you have to claim the deduction in the same year. You can stick your money away on a tax-deferred basis, and then claim the deduction when you’re in a higher tax bracket and need the deduction. Neat, eh?
A million years ago when I wrote The RRSP Answer Book, I did a calculation for growing money in and out of an RRSP that demonstrates the value of using the tax-deferred growth. The numbers are based on an investment of $100 a month inside and outside an RRSP for 35 years at an average rate of return of 10%. (Don’t get bogged down by the percentage… look at the difference in the numbers.)
Outside an RRSP you would have $63,265.36
Inside an RRSP you would have $313,229.24
For a difference of $249,963.88
Even if you had to pay half of that in tax because you took all the money out at once (would you really?) … you’d still be almost $125,000 ahead!
The reason the compounding is different inside and outside the RRSP is that outside the RRSP (and a TFSA) you have to pay tax on your return, reducing the amount you keep. Inside the RRSP, the entire return can continue to compound, increasing your return substantially over the long term.
Mountains of Worry wrote:
I’ve been told that since I’ve already exceeded the number of years at work required for a full pension, that there is a time when it’s not reasonable to continue working. I’m really losing money by being at work. Can you explain this issue to me??
Losing money? Really? I assume you’re still taking home a paycheque, right? Think about this: you could quit work and start living on your retirement income right now? Is that going to make you happy? Or you can keep working at your current job, enjoying the paycheque and the social interaction for as long as you can? Is that going to make you happy? Or you can start drawing your pension and find another job – part time or full time or a complete career change – so you can have both. Is that going to make you happy?
You should definitely be as close as you can be to mortgage free before you reduce your income to your retirement income. And you should have NO CONSUMER DEBT. If you are really concerned about long-term care costs, then you might want to look into long term care insurance. I’m not an insurance specialist, but I know it is expensive and you need to shop carefully.
As for taking CPP early, I wouldn’t if I were you, unless you expect to die early. For every year before age 65 that you pull CPP, you lose 6% of the benefit, so taking it at 60 would reduce your benefit by 30%.
megwilson wrote:
I am curious about making retirement contributions that exceed the amount available for deduction. ie your tax return states you can contribute up to $15,000 in the following year and you find you have funds in excess of the $15000. Do you just place it in any investment vehicle of your choice??? Or do you over-contibute to your RSP? is there a penalty?
Megwilson, you can over-contribute up to $2,000 (lifetime) to an RRSP before the penalty of 1% per month kicks in! Instead of over-contributing, consider setting up an unregistered investment portfolio. Hold all your interest-bearing investments inside the RRSP and those that earn a capital gain (like stocks) in the unregistered portfolio to get the biggest tax benefit.
Pam wrote:
I’m 24 and have been saving 10% of my income for 2 years now. I’m terrified it won’t be enough. I can’t find any online calculators/resources of how much you should save if you start early.
Relax, Pam, you’re doing fine. If you want a calculator that will help you with your retirement planning go to fiscalagents.com and check out their retirement calculators. Some are quite complex, but the Retirement Planner is easy to follow. I’ve used it myself and like the result. The only thing is if you expect to need a higher income than their example, then you also need to adjust down (from their recommended 30%) the percentage you’ll get from government sources. I used 20% and it worked well.
Kristin wrote:
my income is also rather low, and i think i would almost prefer to pay the tax now, so at least i know my money will be MY money when i need it, with no ones hands in my pocket.
Kristin, lower income earners sometimes aren’t best served by an RRSP, particularly if they didn’t start saving in their early 30s. There’s a gentleman by the name of Malcolm Hamilton, worldwide partner with Mercer’s (the pension consultants), who has long held that RRSPs aren’t for everyone. Why? Well, low-income seniors who are dependent on the Guaranteed Income Supplement (GIS) and its means-tested provincial and municipal counterparts could end up losing benefits, subsidies, and aid programs if they have even a pittance saved.
However, if you want to have an income above that guaranteed by government subsidies, then an RRSP is a great way to save. Of course, the new TFSA could give an RRSP a run for its money because of its tax-free status. Time will tell.
Okay, so if y’all have read what’s available in the Articles section, what else do you want to know?
BTW: Are you all enjoying the new Success Stories section where you can post your success stories or pleas for help? Send in your story so we can see how you are doing.
November 1, 2008 at 12:05 pm
Welcome to November Gail. What a pleasant suprise to find a new post from you!
I’m hoping November finds you well and that you find little pleasures in each day. November is a time to remember and reflect. The days are shorter and the nights longer. Enjoy the changes that are coming. Hopefully the longer nights will help you to settle your days and take some time to relax.
*hugs* , Mel
November 1, 2008 at 12:34 pm
Glad to read this and I’m glad to see more people starting to get into PF.
Didn’t know you had a Success section. I’ll mosey on over.
Happy November!
November 1, 2008 at 4:57 pm
Gail, I have another take about RRSP for low income earners. True, seniors with low income will get GIS. However, one never know 10, 20, or even 30 years from now, if our government could afford our pension! (It’s like asking the Americans if they knew, 8 years ago, by voting George W. Bush as their president he would order a war on Iraq thus — one could blame — putting the country in so much debts. Who can guarantee that similar situations won’t happen to Canada?!? And who knows that Canada has national debts, too?) After all, who could guarantee the amount I — as a 20-something-year-old — could get from GIS 40 years from now? I think it would be better to depend on ourselves instead of to depend on the mercy of our governments.
I understand Malcolm Hamilton’s logic. I just don’t agree that it should be the way to go.
I start contributing into my RRSP a few years ago although my annual salary was in the low $20K. I put $50/mth into my RRSP acount then. I think it’s more important to develop a habit than to worry about our tax rates.
Happy Novemeber to you, too, Gail!
November 1, 2008 at 5:16 pm
Gail thank you SO much for taking the time to respond to our questions. You are such an incredible resource! I’m so appreciative to get the straight goods from someone who knows what she’s talking about.
November 2, 2008 at 2:23 am
@ Angela – though you are 100% correct to take ownership for your own retirement, as per another post I wrote its extremely, extremely likely that Canadian government pension plans will be in existence in 40 years.
The Canadian governments pension plan is well funded. Unless its mad max style world apocalypse time in which case money won’t matter anyway, it will be there in our lifetime. Don’t take my word for it, here’s an interview the fund manager. Sounds like a sharp guy. http://www.canada.com/topics/news/national/story.html?id=59a6c1f2-09de-4bc3-802f-c5ad81cce18d
No party on earth would risk scrapping this, given the wickedly high % of seniors who wisely exercise their right to vote.
P.S. Without getting too off topic, its difficult to know if another president would have chosen not to go to war given the circumstances. Even now, if Obama wins, he’s made it pretty clear that there will be no immediate plans to change their current military course of action.
November 3, 2008 at 10:45 pm
sure, the government pension programs may not be there, which is why we have our own non registered stuff.
but if that’s the case (which isn’t likely) then who’s to say tax laws won’t change and there won’t be any benefits to RRSPS? may be it will be worse?
hard to plan for who knows what.
the US has been in debt since it’s very existence, the war is not what’s bankrupting them, they are profiting from it.
and the war is profiting too many people (you know the same people that blew up the country are rebuilding it for profit), i’m sure any other president would have seen as much green as bush did. and maybe the next one will too. almost all the ones before him did. but that’s off topic.
November 4, 2008 at 8:26 am
Thank you, Gail.
I needed to hear it said that I should be mortgage free or nearly there even though I knew that. I needed to hear that CPP might not be my best plan as I had suspected. I needed to hear what will make me happy? That’s the one concept that I have real problems with. I can retire, if I want to live frugally. I’m not so sure that I want to do that especially with no real retirement plans for a change of career or a major change in my life preplanned.
I’ll keep plugging away at the mortgage by upping payments and keep reducing expenses (cell phone this month – my contract is up and I’m over and done with it). My emergency savings are getting better – though they are not huge yet. My other savings I never touch and will grow with time. I’ve managed to keep to a budget and I’m constantly looking at things from a different approach – put more money into savings from this month’s lower bill and set aside money for expenses later. I have been on a spending holiday since Sept 2007- no money spent for lunches and no clothes except for necessities. I’ve had good success here but I can still continue to improve in little ways.
November can be a challenge financially for some, it’s dreary for others and it’s nearly time for Christmas which can really get others upset. This year will be better for me as I’m ready for it. I have $2000. ahead to get over any nasty and unknown costs. You’ve made me a better planner, Gail.
I can only hope that your November will be a little better for you. You need a break with what you are going through. It takes time to heal the wounds. Sharing with friends helps to get through the tough times. Big hug!!