Dave's retirement journey

The end of saving for retirement

By Dave Dineen, BrighterLife.ca

Gee, this feels weird! I’m like a squirrel without nuts to store for the winter. This year, for the first time in 22 years, I won’t be making an RRSP contribution.

Image of a mature couple enjoying their retirement savings on a fixed income, requiring better budgeting.For 22 years, our single-income household squirrelled away money in RRSPs. We scrimped, scrounged and made saving for retirement a priority. Sometimes, we even moped about not being able to gratify ourselves instantly by buying stuff.

But we stayed true to our values, we stuck with the plan and, every year, we managed to contribute to our RRSPs. Some years, I had a bonus from work that went straight into the RRSP. Other years, an income tax refund formed the base of our RRSP contribution for the following year. Sometimes, we were disciplined and made regular contributions – and other times, we just made small contributions whenever we found a few unused dollars. Almost every year, we managed to make the maximum contribution.

No RRSP contribution room

As a retiree, I no longer have what the Canada Revenue Agency calls “earned income,” which the CRA uses to calculate RRSP contribution room. No earned income means no RRSP contribution room – it’s that simple.

Less money to contribute to a TFSA

Since tax-free savings accounts were introduced in 2009, my wife and I have also stashed money in them. The first week of every January, we met our advisor with cheque in hand to make our maximum $5,000 a year contribution to each TFSA.

But not this year. In 2012, I’m focussed on living, not saving for my future life. Like most retirees, I don’t currently have an income big enough to let me continue to add to my savings. (Having said that, I may still contribute to our TFSAs in future years.)

Shift from retirement saving to spending

I retired early – and not a multi-millionaire – so I guess it’s no surprise that I’m now focussed on living well today, rather than saving even more to live even better at age 65, 70 or whatever.

For me, today is the first day of the rest of my life, while I’m young enough, healthy enough and vital enough to fully enjoy myself. I’m doubly lucky, because I have a partner who is also young enough, healthy enough and vital enough. So, I’m not waiting for tomorrow to start living.

But that doesn’t mean I’m living only for today. I’m a healthy 55 years old, so I’ll need the retirement savings I’ve already accumulated to last 30 years, 40 years, maybe longer!

End of saving requires better budgeting

My wife, Anne Marie, who does the day-to-day household budgeting in our family – and does it really well – had an “aha!” moment the other day.

“I finally understand what retirees mean when they say they live on a ‘fixed income’,” she said.

When we were still in our over-extended working years of struggling to save while spending, she could always count on future savings. Unless the RRSP deadline was today, or the car broke down today, or the roof needed fixing today, it wasn’t just blind optimism that let us think that before the RRSP deadline came, or the car finally died, or the roof caved in, we’d save enough to somehow squeak through yet another Dineen family financial crisis.

But now, in retirement, we are no longer saving for the future. So how will we survive future Dineen crises? With an effective, disciplined family budget.

I’m sure Anne Marie – our family’s effective, disciplined budget manager – is up to the task.


Follow Dave’s real-life retirement experiences in Dave’s retirement journey.

For more helpful retirement planning tips and tools, visit My retirement café. There, you’ll find information about the various phases of retirement, including what you may face when you are newly retired, as well as information about your income and savings options.

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Michael Nuschke on

A couple thoughts;
- advances in medical technology over the next 15-20 years may result in significant expansion of healthy life spans
- This same phenomenon will put severe additional pressure on pensions

The result is that it may be be a good idea to be open to earning additional income.
Most will be doubtful of this, but if you start watching the breakthroughs in medicine, it may start to make sense.
Cheers,
Michael

Myron Duff on

Congrats Dave on retirement.
I take issue with some of the numbers thrown around by the professionals. In your case with a 40k income would you and your wife not get the first 22k tax free from your RRSP the draw some from “outside” sources that are tax paid such as the gains you made on your real estate effectively giving you a zero tax rate?
It is being bantered about that the tax refund will not be saved. Is that not the case also then of the money not sheltered and made slightly less accessible in an RRSP plan?
Also the Idea that a dollar today is worth more than a dollar tommorrow. Why wouldn’t I want to give the government dollars from 30 yrs from now instead of todays? These things are double edged swords and need to be considered in all contexts rather than fitted to one person’s personnal crusade.

Jim M. on

Person A earns $100,000 a year every year starting at 35 until he retires at 65. He puts away 10,000 a year into an RRSP which he collapses at 65. He lives in Alberta so assume his marginal rate is 30%. He puts the $3000 he didn’t pay in tax into a TFSA. Say the funds grow by 7% each year. At 65 he has $944,000 in his RRSP, on which he pays 30% tax on at the point of collapse, or $283,000, so there is $661,000 remaining in the RRSP. There is $283,000 in the TFSA, to a total of about $944,000.

Person B, earning an identical income, follows Robert Botnick’s advice and saves $10,000 a year every year starting at 35 until he retires at 65. But he didn’t open an RRSP, so rather than put the $3000 a year into a TFSA, he gave it to the CRA. He has $944,000 saved up (assuming he never sold anything), so he pays 30% on half of the gain, or $97,000 in capital gains tax when he cashes out his investments. There is $847,000 left.

Mr. Botnick replies to the effect that most people spend their tax return, which is irrelevant to his argument that you shouldn’t take advantage of the tax breaks.

With respect, the advice proffered by Mr. Botnick cost Person B approximately $97,000, which is more than the entire savings of many Canadians. In fact, it would cost Person B at least that much when you consider that collapsing the RRSP is generally the least favourable option.

Paul L on

Robert Botnick’s analysis confuses me a little with the comparison between putting 10,000 into an RRSP as opposed to a cash account.
One issue not addressed is taxation over the next 20 years on the cash account. The 30,000 gain is said to include capital gains and dividends so I am assuming there would be tax payable before age 65. Hard to predict because we don’t know how often assets are bought and sold.
A second issue is the cost of the initial investment. Putting 10,000 into the RRSP costs only 6302 because of the tax credit. What happens to that money. If the taxpayer had no contribution room left after the 10,000 then the 3298 could be invested in a cash account and would be worth 13192 at age 65. This includes a gain of 9894. If half is taxed as a capital gain at 31.5% the tax is 1558 leaving 11634.
What am I missing here?

    Robert Botnick on

    Hello Paul, You can invest in mutual funds known as “D-Series”. Deferred Series mutual funds allow the investor to buy and sell mutual funds, realize profits, and pay no taxes during the (20 year) accumulation phase. This means that every penny keeps working for as long as you want. You will however pay your taxes when you withdrawl cash out of the investment account. The payout to you would be as follows. First you would receive Return of Capital which has no taxes, its your investment funds coming back to you. Then Capital Gains, Dividends, and lastly Interest.
    Once again I would like to point out that very few people actually invest the tax refund. It is used for something other than retirement.

CoCo on

Thanks to everyone who shares their own personal experiences. I’m 49 and have been disciplined with the RRSPs as well. I have some different thoughts on what retirement means to me. I think of Freedom 55 as being able to make the choice of not only if I work but where I work, and when I work, but I do know I need to have a reason to get up in the morning. I’d be stir crazy with out a job. I’ve started experimenting with second jobs to get a taste of what I will call semi-retirement. I call my second job a hobby that pays, for me it is pure enjoyment, I work outdoors whereas my real job is indoors – manufacturing.

    Robert Botnick on

    Hi CoCo glad you found your way here. As I pointed out previously RRSP’s are the least efficient way to save for retirement for 90% of Canadians. Depositing your retirement savings into a “cash account” will result in taxes which are only half that of the RRSP. A TFSA will result in NO TAXES, you keep all of it in your pocket. I am meeting so many people in their 50′s that still have a mortgage on the family home. If Canadians at large practiced Modern Personal Finance, they would be able to do just as you have said, “able to make the choice of not only if I work but where I work”. Your reason to get up in the morning is because you are going to a place where you can enjoy what you are doing, and get paid to do it! This is exactly how I feel about my career as a Financial Advisor. I look forward to your input in; the future.

      DaveDineen on

      Robert – your expertise and commitment come shining through!

      David H on

      Robert, I’ll disagree. RRSPs allow you to defer taxes (always good), and move them from a higher to lower tax bracket. In the meantime, they grow tax-free. I would argue they are probably the most efficient way to save for retirement for most Canadians.

      Your comment that TSFAs are tax free is not true. You pay the tax up-front, because you buy them with after-tax money.

    DaveDineen on

    CoCo – I like your definition of ‘retirement’! It reminds me of Jonathan Chevreau’s (the Wealthy Boomer columnist of Financial Post fame, who has just announced that he’s going to edit Moneysense magazine) definition of retirement as ‘financial independence’.

      Robert Botnick on

      David H. To begin with I’ll provide a little background. What we know now is that most Canadians require between 60 and 70% of preretirement income. An individual with income of $75,000 will require at least $45,000 in retirement. Using the current CRA income tax rates, preretirement tax rate = 32.98% and the postretirement tax rate = 31.15% *These are the Ontario tax rates* Now let’s make a one time investment into the RRSP for this individual of $10,000 Lets use age 45 for this calculation and an annual rate of return of 7%. According to the “Rule of 72″ this investment will double twice to age 65. So when you deposited to the RRSP you received a tax credit from the CRA of ($10,000 X 32.98%) = $3,298. Your investment has grown to $40,000 and your postretirement tax rate is 31.15% ($40,000 X 31.15%) = $12,460 Your tax credit 20 years ago has also doubled twice for the CRA.
      If we use the same numbers and instead of an RRSP we use a “cash account” to hold the investment. What we end up with is this: Value of account at age 65 $40,000 There is a gain of $30,000 which is comprised of capital gains and dividends. We have the 50% capital gains exemption in Canada so only $15,000 of your gain is taxed. If we calculate as follows: ($15,000 X 31.15%) = $4,672.50 taxes due to CRA. By not investing in an RRSP you end up with $40,000 – $4,672 = $35,327.50 in your pocket. With the RRSP scenario $40,000 – $12,460 = $27,540 As you can now clearly see that tax break of $3,298 twenty years ago cost you $7,787.50 There are many people who call themselves Financial Planners, Financial Advisors and Personal Financial Planners who stll don’t get this. They are doing a great disservice to the greater population of working Canadians. Who do you want in your corner?

      David H on

      Hi Robert, I appreciate the effort you put into your response, thanks.

      However, you are downplaying the initial tax break on the RRSP. As you put it, “that tax break of $3,298 twenty years ago cost you $7,787.50″. But if you invest that amount in the same vehicles that double every 10 years, that $3,298 is worth $13,192, well above the $7,787.50 in tax savings from the cash account.

      Robert Botnick on

      Dave, I enjoy playing “financial chess” with you. I conceed to your point on the investment of the $3,298 if someone has the discipline to invest their tax refund. As I now know from having many conversations with people, the tax refund inevitably became a suit, a chair, a vacation, a car payment, a dress, a hobby, groceries etc… Most people don’t direct tax refunds to the future.

Mary C on

Robert, please explain the benefits of a permanent life insurance policy in Dave’s scenario. Will they still have access to the cash value if required for supplementing income if Dave was to live to say 90 years old? Leaving an estate for favourite charity or children is a great idea, but what if they need the cash to live on before both Dave and his spouse pass away?

    Robert Botnick on

    Mary C. Thank You! Thank You! Thank you! This is the sort of high caliber question my clients learn to ask once they have gained the knowledge to ask a better questions. Here is the mother of all life insurance strategies that protect your family and estate while also giving you future access to tax free retirement income.
    You would start off by purchasing a time defined participating life insurance policy. In other words it has an end date when you will no longer pay premiums. This type of policy is designed so that the cash value increases at a faster rate than the death benefit. The policy receives an influx of dividends each year and continues to grow increasing in cash value and death benefit. Just a quick note before we go on. Once a dividend is paid to the insurance policy the dividend is vested. It can never be taken back in the future. .This policy (investment) only rises in value. So in Dave’s situation (20 years down the road. He hasn’t passed away and he has this cash value tied up in the policy. He goes to his banker and pledges the cash value in the policy to a secured line of credit. Dave can now start drawing funds on the line of credit to supplement his retirement. He is actually receiving funds in retirement and the only cost to him is the interest on the line of credit. There has never been a time in modern history when interest rates have been greater than employment tax rates. If Dave were doing this today he would be paying approximately 3.75% interest instead of a 25% marginal tax rate. Note* The amount of cash value removed will also reduce the death benefit dollar for dollar. This concept works with as little as $5000 annual premiums. We have been putting professional athletes into this scenario for about 10 years now. This is pure poetry in financial efficiency!

Robert Botnick on

Hi DaveD, Have you ever thought how much more of your RRSP $$’s you would have kept in your pocket instead of paying tax. At the prime age of 55 you have the ability to accomplish a RIF meltdown strategy on part of your RRSP. Let me first assume that you have $500K registered and $500K non-registered. The RRSP funds will be taxed at minimum of 20% as you draw income over your lifetime which means your taxes to CRA will total $100K. If your marginal tax rate is higher, then CRA gets a larger slice. Please consider this scenario. If you and your wife were to simultaneously become deceased, the CRA would take 48% of your RRSP or RRIF in taxes. This is due to tax law in Canada that requires all assets are deemed to be sold in the year of the death of the annuitant or owner of the investment. Which means there is a potential for your estate to loose at least $230K If your investments were in the form of Capital Gains and Dividends the CRA would only be getting about $115K. If you were to use a conservative RRIF meltdown strategy, by the age of 65 you could increase your net worth by 35 to 45 percent. And best of all, you will be paying less tax. Then again you could always use a permanent life insurance strategy to pay for the costs associated from transitioning wealth between generations. Just a couple of thoughts

    DaveDineen on

    Hi Robert. You bring up a good point we’ve considered. We’ve had a preliminary discussion with our advisor, but probably won’t make any decisions until next year, given our own situation.
    This is definitely the sort of high-level retirement income strategy thing that an advisor experienced in retirement INCOME vs. Retirement SAVING can provide great insights and value on.
    It can make great sense for some folks, but not everyone.
    Thanks for a thoughtful comment!

      Robert Botnick on

      Hi Dave D. I don’t consider this to be high end stuff, its actually quite simple! This strategy is for everyone that has been brainwashed by the banks and our government. I want you to know that I am on a mission to rescue my generation and my children’s generation from a belief system that is designed to keep you in debt for as long as possible and to keep taxes flowing to the CRA.

    David H on

    Robert, can you explain your comment “If you were to use a conservative RRIF meltdown strategy, by the age of 65 you could increase your net worth by 35 to 45 percent”. Not sure I am understanding your recommendation.

      Robert Botnick on

      Hi David H, First I must confess that I’m an analytic. Secondly I like to see financial situations as they are. With these two points out in the open, now we can have a conversation. I have found that when I sit down with clients to prepare their cashflow and balance sheet analysis, I want them to see the real picture. When you hold retirement investments you inevitablly have tax consequenses. These tax considerations need to be removed from the net worth figure since they are an obligation (liability). So if your marginal tax rate is 31% on a (RRSP or RRIF) portfolio worth $400K your obligation to CRA is $124,000. But if you die while the portfolio has significant value, the portfolio is deemed to be sold upon the death of the owner (if no spousal rollover). When this happens the marginal tax rate is somewhere between 45 to 48 percent.
      Let’s use the above $400K portfolio (RRSP or RRIF) and melt it down. The portfolio would not trigger income taxed at the 31% marginal tax rate which equals $124,000 Through the meltdown strategy the portfolio would be comprised of capital gains and dividends which are taxed at preferential rates. So here is the bottom line.
      $400K taxed at 15.58% ($62,300) leaves you with $337,700 instead of $400K taxed at 31% (124,000) leaving you $276,000 The difference in your pocket is an extra $61,700 So if we based your net worth only on the portfolio your net increase as a percentage would be $62,300 divided into $276,000 = 22.57% increase to net worth. This is just one scenario that I created on the fly.. There are an infinite number of scenario’s. Every time I sit down with new clients I tend to shut up and LISTEN. When I mentioned an increase of 35 to 45% this was based on a (high income – high net worth) client. Hope this addresses your question David H.

      David H on

      Robert, thank-you for your response. I understand what you are saying…

    DJ on

    Do you practice in the Vancouver area? I wouldn’t mind making contact as I’m just beginning to think of what my long term strategy should be.

David H on

Congrats, and I look forward to reading more on your blog. We are in an almost identical situation (and my name is Dave, too!). I’m curious if you are finding the $40,000/year (4% of $1M) kind of tight?

    DaveDineen on

    Hi, DavidH. We’re living off of about 4% of our overall financial assets — which includes a bit of defined benefit money I don’t usually factor in since: A) I haven’t started getting that income yet, and B) with DB plans, the income stream is the whole point, rather than the amount of money the employer needs to have in the DB plan to deliver on the DB plan’s promise of lifetime income.
    So, we’re somewhat over the $40,000 a year you estimated, but are well below 4% of OVERALL financial assets when you estimate the one-time value of the future DB income stream.
    Anyway, we’ve got a pleasant lifestyle, though many people would require more (or less!) to support their idea of a nice retirement. Cheers!

marci on

We may be in different age brackets but wow – what an inspiration and great reminder of what you can accomplish by setting goals! I hope you enjoy every moment of your freedom now!

Paul L on

What would be interesting is an idea of how much the author has saved, what kinds of investments he has and what other income sources does he have? He says he is not a multi millionaire but leaves a pretty broad range. Nice to be able to retire in the mid 50s. Very impressive if able to do so solely on the basis of RRSP savings.

    DaveDineen on

    Hi, Paul. My wife would kill me if I answered all of your questions. ;-)
    But this much I can tell: We have registered and non-registered savings that total in the neighbourhood of $1 million. Until 3 years ago, we’d never had non-registered savings but downsizing freed up some equity in real estate. For as long as I’ve kept track of our net worth, half of it was in real estate, so downsizing instantly made retirement more achievable because some of the real estate asset became a financial asset (i.e. investment) that could pay an income. There’s nothing magical about our actual investments — they’re reasonably safe and pay a decent income. We’re living off of comfortably less than 4% of the total value of our investments, and I feel good about that.
    Good luck with your own journey, Paul!

      Paul L on

      Thanks for your candour! I am hoping for fairly modest retirement myself, unfortunately not at such a young age but I want to do better than the last generation of my family who soldiered on much past 65.

Michelle Smyth on

Wow Dave! You actually pulled off Freedom 55? That’s a real accomplishment when the average Canadian is saying even Freedom 65 is unlikely. Way to go.

    DaveDineen on

    Thanks, Michelle.
    My sense is (early) retirement is more achievable than many people suppose. I dreamed of retiring at 58, but when I ran the numbers at 55 … they worked! It’s important to know how much you need to live on, which you can figure out on your own. But well before you take the plunge, have a good talk with an advisor. Good luck!

      ED on

      My problem is I don’t quite understand what numbers to run. I find many different scenarios on the web and they frequently disagree. We have been self employed our entire life so we don’t have a defined pension plan but purchased real estate as inventments as well as RRSP’s. We have about 300K in RRSP’s and about 850K in real estate with about 70K owing. We own our home free and clear as well as both our vehicles. Could you give me some idea of how to calculate what we will actually need to retire. My husband just turned 60 and I am 58. Oh, we also have about 200K in savings.

      DaveDineen on

      Hi, ED.
      As you’ve pointed out, there can be a lot of moving parts to this kind of calculation.
      It all starts with understanding the retirement lifestyle you and your husband want. When you agree on that (many people don’t spend enough effort on this part!), you turn to calculating what you’d expect that lifestyle to cost. You should be able tackle those two steps on your own, because even the best retirement advisor can’t answer such personal questions for you.
      But an experienced, accredited, retirement advisor can add huge value — and reduce your risk of failure — at subsequent stages of retirement planning. Those stages would include things like factoring in your personal inflation rate, estimating how long your retirement income needs to last, helping you figure out your options for generating a steady flow of income (e.g. will you earn rent from your investment properties, or will you sell the properties and invest what’s left over after paying capital gains tax, in what sequence and at what times should you convert your assets/savings/investments to produce income).
      No online calculator or personal finance book is going to be able to adequately walk you through those issues, which is why asking an advisor for a detailed plan is key. A comprehensive retirement plan, by the way, should also address how future health care would be funded, how you’d like your estate distributed, and how much guaranteed income you’ll need vs. how much you’re willing to trust to be generated in volatile financial markets.
      I’m not a financial advisor, but I can see that you and your husband have built an impressive investment and savings portfolio.
      Converting that into a lifetime of income that will fund the retirement you want takes a whole different skill set, so don’t be too hard on yourself that you’re finding it a difficult task.
      I think you’d really benefit from working with a financial advisor with solid experience helping people plan their way through this huge transition in life.
      Best of luck!

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