Saving $100,000 in my RRSP by Age 33

Now that I’m employed full-time again, I’ve revisited some goal setting in my savings. One of my main focuses (which seems to be intensifying as I’m getting older!) is saving for retirement. I like accumulating lots of retirement savings, not just for the security in my future old age, but also because of options like the First-Time Homebuyer’s Plan, which would let me withdraw up to $25,000 from my RRSPs for a down-payment on a home. Still, the primary goal of my retirement savings is net-worth building. These are long-term investments that I don’t plan to withdraw from for decades, but make me happy now to see a big balance on my personal net worth sheet!

Because my income is primarily from blogging and now a summer internship, I’m still not totally sure what my total income will be for this year, but I’m guessing it will not be high enough to be favourable tax-wise to contribute to my RRSPs. Consequently, I’m directing my savings to my TFSA, even though in my mind it’s still ear-marked for retirement. I can always transfer the extra savings from the TFSA to RRSP if I need the tax advantages in future years and/or continue to contribute a little bit to my RRSPs and claim the deduction later. My primary goal in the next 2 years is to max out my TFSA, and then focus on maxing out my RRSP.

I would like to have saved at least $100,000 for retirement by age 33.

Originally, I thought age 35 but since I’ll be about half-way to $100K at age 30 after only saving for 5 years, it doesn’t seem reasonable to expect less savings success in the 5 years following my 30th birthday! I think age 33 is a short enough time away (5 years) to be challenging but still doable. I’m actually hoping to exceed it, but I don’t want to sacrifice other financial goals for it so middle ground at $100K seems just right! As far as past and current progress though, this fits in just right:

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my retirement savings plan & progress (low savings rate for age 27 & 28 because I’m currently an MBA student!)

I made the savings right slightly more aggressive in later years for 2 reasons: 1) it’s more likely than not my income will be higher as I age and 2) as I save more money, more interest & dividends are earned each year helping me reach my goals faster. I’m hoping when I finish school and work full-time as a salaried employee again, I find an employer with a retirement matching program of some sort too!

Currently my retirement savings is comprised of cash savings, a mutual fund, and stocks in this proportion:

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While I love investing in the stock market in order to get a higher return on my money, as years go by I will want to reduce the risk in my retirement assets so I’m expecting by age 33 the distribution will look more like this:

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I’m not sure if I’m totally on board with having $15,000 of cash and $20,000 in mutual funds lying around — right now I’m hungry for more risk than that. Furthermore, because the stocks have higher returns, that account is growing faster than my other investments and I can’t really wrap my head around saving more as cash rather than buying more stocks, but that’s what I’d need to do to get this pie. Nevertheless, designing a rough framework gives me a bit of an idea of where and how to save.

The main component of this plan is just being disciplined enough to grow my retirement savings by $12,000+ per year, and the main risk is market fluctuations since the bulk of my savings is in the stock market. 

Saving $100,000 for retirement by age 33 is attractive for a number of reasons, namely that banking six-figures so early gives the nest egg a number of decades to grow before I need to make any withdrawals.

$100,000 invested at age 33 returning 5% will grow to nearly $500,000 by age 65 without any further contributions.

As per usual, I’m always advocating shortcuts, and I can’t think of a better one than getting six-figures into your retirement savings in your early 30’s!

Why You Shouldn’t Borrow To Invest In Your TFSA & RRSP

*Note: I’ve updated some of the wording in this post since it went live to replace the places where I said “borrowing on a margin” to say “borrowing to invest”. I was using the terms interchangeably when they’re not for these types of accounts: “Government regulations prevent you from trading with margin in registered accounts like RRSPs, TFSAs and LIRAs.” (because it’s dumb, as you will see in the post below). Sorry for the confusion! I had also typed ‘ever’ as ‘every’ so this definitely needed a proofread ;)

You can and should open brokerage accounts within both your TFSA and RRSP. I suggest the TFSA first, because if you’re a new grad just starting out, it’s unlikely your income is high enough to justify aggressively contributing to an RRSP — particularly if you paid for your education yourself and have tuition credits you can claim. For an understanding of how an RRSP and TFSA differ, here’s a quick cheat sheet:

The TFSA vs. RRSP

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 The main difference between a TFSA and RRSP is how the funds in each account are taxed, particularly in a brokerage account. In a TFSA brokerage account, all dividends, interest and capital gains you earn on your investments is tax free. This is a huge advantage in this account because if you continue to reinvest dividends and interest, the compounding income will also be tax-free. In your RRSP, you’ll also benefit from compounding, however you will be taxed on all these gains when you withdraw the funds with the exception of borrowing under the first-time Home Buyer’s Plan or the Lifelong Learning Plan. To learn more about withdrawing from your RRSP, check out this post: Ways To Use Your RRSP For Things Other Than Retirement.

A seasoned investor might understand that using leverage like cash borrowed on a margin for trading is a quick way to grow you money. After all, if your investments increase in value, the more you’ve put in, the more you’ll get out. However, if your investments lose money,  twice because you still have to pay back what you borrowed. Taking this risk on accounts that have contribution limits is idiotic. If you lose even part of your investment, you never get that contribution room in your TFSA or RRSP back. Which is why I suggest…

Don’t borrow to invest in your registered accounts!

Borrowing to invest can turn very expensive, very fast. Depending on where you get the funds to invest, the total borrowing cost could vary from 3% on a line of credit to 18%+ if your funding it with a credit card (I don’t even want to go into how stupid that is).

This means that when you borrow to invest, you need the stock to earn at least 3% to 18% just to break even, and even more if you want to make a profit!

I don’t think it’s unreasonable to earn 3%+ on a stock, but shooting for 18%+ is a little more challenging.

and what if you lose?

This is where it gets nasty. For example, someone borrows $5,000 to invest in a hot stock in their TFSA. They borrow this at 6% so in a year’s time they will have to pay back $5,300. They dump all $5,000 plus an additional $5,000 of their own money for a total of $10,000 into one stock and watch it for 12 months. It falls, and then falls agin, finally plummeting down 20% to $8,000 by year end. Finally ready to call it quits, the investor withdraws their money and pays off the $5,300 they owe the brokerage, leaving only $2,700 for themselves. This means of the $5,000 of their own money they initially invested, they lost nearly 50%. Ouch!

They also lost the contribution room in their TFSA.

That’s $2,300 that could be safely earning interest in a savings account. If you’re thinking buying stocks in your TFSA at all is risky because a loss will always translate into a loss of contribution room, you’re right. And that’s why investing in stocks is riskier than keeping your money in a simple savings account. But what’s most important to note is this:

borrowing to invest unnecessarily magnifies risk. 

If the person had invested only $5,000 of their own money, they would have suffered a loss of only $1,000 instead of $2,300. If they had saved up the extra $5,000 they needed and gone all in for $10,000 just like in the example, they’d only be down $2,000 instead of $2,300. It’d still be a loss, but at least they’d have an extra few hundred dollars. They’d only realize a loss of 20% instead of 46%. That’s a HUGE difference!

The scenario plays out the same way in your RRSP. If you borrow and lose, the RRSP contribution room is gone forever. If you’re serious about building wealth, you know that investing in stocks in a registered account is risky enough and you don’t want to magnify that risk with borrowed money.

Is it ever ok to trade on a margin in your TFSA and RRSP?

Honestly, it’s up to you! I’m too risk-averse to gamble with fire in my registered accounts but some investors might really feel confident borrowing to invest in their TFSA or RRSP. As a seasoned investor with maxed out registered accounts that have already returned some extra money for you, you might feel comfortable taking the plunge and buying on a margin. Ultimately, it comes down to what kind of investor you are. But if you’re like me and still managing small investments (less than $50,000) and still learning the ropes of the stock market, buying on a margin is simply too much risk for too little reward.

What are your thoughts? Is borrowing on a margin in your registered accounts a great way to build up your long term savings or too scary to play with contribution room you can’t recover?

Stop making excuses for why you “can’t” save $25,000 for retirement by age 30

My 30 Financial Milestones You Need To Hit By Age 30 post recently went viral. It was met with a tremendously positive response, but there were a few naysayers in the mix. They seemed to congregate around one point of contention:

#5 – Have at least $25,000 saved for retirement by age 30.

Even the Globe & Mail’s Rob Carrick suggested this might be “unrealistic”. He wasn’t alone. Many people insisted that whether or not you can hit this target depends on your circumstances: what you studied in university, how much debt you have, whether you have to support yourself, when you started saving, blah blah blah.

Before we continue, I want to point something out. My original suggestion was that you actually have the equivalent of one year’s salary saved for retirement by age 30 — I was low-balling it with the suggestion of $25,000! In other words, I thought I was cutting you guys some slack, not making an unattainable target. Geez! When I push my readership for big goals or flex some of my financial muscles, I’m occasionally met with some disgruntled protests that I must have had some easy ride and therefore can’t sympathize with the average saver. Money After Graduation readers that have been around for awhile already know this is not the case, but for those with doubts let’s do this…

Bridget’s Brief Financial History 

  • I took time off between high school and university during which I did a whole lot of nothing and saved $0.
  • I have lived on my own, paying rent without any parental help since age 18.
  • My cheapest rent was $400/mo ten years ago and it’s steadily increased since then. I now pay $1,200/mo to live in Calgary, Alberta – the 4th most expensive city in Canada.
  • My parents did not pay a single penny towards my university tuition.
  • I will have spent over $75,000 on university tuition, fees, and books by April next year.
  • I paid off over $20,000 in student loans from my Bachelors degree in 22 months.
  • To date, I’ve only worked for 2 full-time years in a professional job in my 20’s.
  • I didn’t start saving for retirement until age 25 (I am now 28).
  • When I left my professional job to go back to school full-time, I forfeited my employer-match on my retirement contributions, a “loss” of over $10,000.

But what’s the most important point about my journey?

I have over $25,000 saved for retirement

(and 2 years to spare!)

So what I really want to say is there will be no whining about your debt load, lack of parental help, cost of housing, lack of years in the workforce, late start on saving, etc etc going forward. You will not get any sympathy from me. This is because sympathy doesn’t make dollars, and I’m assuming you’re here because you want money, not hugs. Let’s get started!

How To Save $25,000 For Retirement By Age 30

Step 1: Stop Whining. Seriously, stop. Like in my posts on how to save six-figures in seven years or increase your net worth by $25,000 annually, I will not indulge the reasons you can’t (aka. don’t want to) save $25,000 by age 30. The only real reason you might not be able to save $25,000 by age 30 is you are aged 31. No other excuses accepted.

Step 2: Do the math. You will earn between $300,000 and $400,000 (or more!) during your 20’s — and you’re telling me you can’t save less than 10% of that? Boo! If you start at age 20, even if you make a small salary you only need to save 6% of your income to bank $25,000 for retirement by age 30.

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chart assumes student is working part time at ages 20 & 21 and thus has a reduced income! Salary increases by 3% annually assuming regular, small raises.

If you don’t start saving at 20 then you have to save more when you do start! Sucks? Too bad, that’s math. If you’re a late bloomer like me and don’t start saving until age 25, you might have to save 10% of your income to reach $25,000:

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a late bloomer saver doesn’t put anything aside until age 25, at which point they start saving 10% of their income. Salary and salary increases are the same as the previous example.

Maybe now you can see how I made it to the $25,000 mark despite getting a late start. At one point I was dumping over $500/mo into my retirement accounts — talk about playing catch up! Which brings me to my next piece of advice…

Step 3. Get started ASAP! This is an urgent, please-begin-yesterday matter. Why? Because assuming you can achieve an annual return of at least 5%, every dollar you put away now is worth $7 at retirement 40 years from now.

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So next time you’re complaining that your part-time job is only paying you $10/hr, remind yourself that that is actually $70/hr for your 65-year-old self. Are you seeing why this is so important now? If you manage to bank the full $25,000 by age 30, you’ve actually saved $176,000 for retirement.

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Step 4. Manage your assets. If you can score every 1% higher average rate of return, that final number at retirement will soar above a quarter of a million dollars. Is $25,000 really looking like it’s not worth the effort now? The most important components of managing your assets are: 1) investing for the long-term (this means no crazy day-trading or chasing after “hot” stocks), 2) diversifying your savings. Try keeping some of your retirement in safe places like cash and bonds, some in moderate risk investments like mutual funds and dividend stocks, and the rest in growth stocks and ETFs and 3) NEVER WITHDRAWING THE MONEY. In Canada, you’re allowed to borrow from your RRSP for things like a down-payment on a home or to go back to school. This is a quick way to undo all your hard work! Do not eviscerate your RRSP to buy a home or pay tuition.

Where can you get the money to contribute to your retirement accounts in order to reach the monthly and annual contributions required to reach $25,000 by age 30?

  • work extra hours or at a part-time job.
  • ask for a raise.
  • take advantage of employer retirement plans or other benefits if available.
  • leverage a hobby or skill into something paid, like freelance writing or tutoring.
  • sell clothing, books, or electronics that you no longer need.
  • skip upgrading your phone/computer every year and hold on to your old technology for 3, 4, or 5+ years.
  • cut out a sinful expense that’s hurting your body and your wallet (ie. cigarettes or alcohol)
  • save instead of spend cash windfalls like an inheritance, graduation gift money, or income tax refunds.
  • skip an annual vacation.
  • put off a major purchase like a car, downpayment on a home, or a wedding for another year (or two!)
  • have 1-2 beers on Friday/Saturday nights instead of 3-4.
  • move to a smaller, cheaper apartment or get a roommate.
  • maximize rewards points programs so you spend less of your own money on things you need.

There’s so many ways!! Which is why I know YOU CAN DO THIS! Do it for the $176,000! Do it so you don’t have to eat cat food or live in a box when you’re old. You’re going to be of the wealthy in your old age, there’s luxury cruises and gambling in Vegas waiting for you, so start stashing cash for that fun!

Happy saving!

Should You Ever Withdraw Money From Your RRSP?

I recently got in a debate with a friend about withdrawing from your RRSP. He reasoned that in a low income year (ie. as a student), it could make sense because the tax hit would be less than that you would experience withdrawing your money in retirement. I disagreed for a number of reasons — namely that instead of deregistering the funds, he should withdraw them under the lifelong learning plan, which he didn’t even mention for some reason — and I have decided to share them with you here.

“Safe” Ways To Withdraw Money From Your RRSP:

The First-Time Homebuyers Plan – The first time Homebuyer’s Plan (HBP) will allow you to withdraw up to $25,000 from your RRSP for a down-payment on your first home. You have 15 years to pay back the amount you withdrew. If you borrowed the full $25,000 this is about $139/mo.

The Lifelong Learning Plan – Lifelong Learning Plan (LLP) will allow you to withdraw  $10,000 per year up to a maximum of $20,000 for education costs. You have 10 years to pay back the amount you withdrew. If you borrowed the full $20,000, this is about $167/mo.

The problem with the “safe” withdrawals:

Distressing data collected by the Canada Revenue Agency reveals nearly one-half of people who used the First-Time Homebuyers Plan, failed to meet the repayment requirements. Consequently, they now need to pay income tax on that amount for withdrawing it from their RRSP. I haven’t been able to find data on repayment of the Lifelong Learning Plan (it’s not utilized as much as the HBP), but I’m doubtful borrowers are perfect at paying that one back either. Borrowing for a home or your education can be justified in the right circumstances, but no matter what, you miss out on compounding. If you fail to follow the repayment schedule of the LLP or HBP, you negate any benefit of borrowing under these plans and end up hurting yourself financially.

Risky Withdrawal From Your RRSP:

Using Your RRSP As An Emergency Fund or to Supplement Income – I can’t blog enough about the importance of establishing an emergency fund, but since this is “Money After Graduation” and not “Emergency Funds After Graduation”, I try to hold off. You should never be without some liquid cash to cover unexpected expenses. It’s important to contribute to your retirement accounts, but if you do it just to withdraw the money during a future time of crisis, you’re undoing all your  hard work and then some. If you don’t have cash on hand for unexpected expenses and emergencies, then you can’t afford to contribute to your retirement accounts. DON’T PUT MONEY IN YOUR RRSP IF YOU DON’T ALREADY HAVE $1,000+ SET ASIDE IN A TFSA FOR “JUST IN CASE”. Ever, ok? Just don’t do that.

Why this is so goddamn risky:

You don’t know what your income will be in retirement. Predicting the future is impossible, I get it, but this is shooting yourself in the foot hoping you miss your toes. As you get further along in your working career and closer to retirement age, it will become easier to predict your retirement income and compare it to your current earnings, but if you’re a high-earning ($70,000+/yr) twenty-something like my MBA classmates, it’s all guesswork. Find another way to get money.

You’re still being taxed. Even if you estimate your current tax bracket in a low income year is less than that you expect in retirement, you’re not pulling the money out tax-free. The $10,000 withdrawal my friend was suggesting would be taxed at 20%. Uh? Wasn’t the point of withdrawing in a low or no income year to avoid taxes? What’s the point of taking out $10K if you’re only going to net $8,000 of it? You better be pretty desperate for cash if you’re willing to see $2,000 of your money go to government. Remember this is $2,000 you don’t get to spend on anything and will never compound in your retirement accounts. Would you rather pay $2,000 in taxes now or have $6,334 in 40 years when you retire? Because that’s exactly what this is.

You never, ever get the contribution room back. Personally, I think this is the biggest downside to deregistering funds from an RRSP: once you do, that money is gone. You can’t put it back. It’s not like a TFSA where what you withdraw becomes new contribution room the next year. If you take money out of your RRSP you can’t put it back. Don’t throw away things you might need later.

You miss out on decades of compounding. The closer you get in age to retirement, the less disastrous withdrawing from your RRSP early becomes. It can even be beneficial to flatten taxes in  your later working years. However, if you’re in your 20’s, deregistering RRSP money cost you big time in the long run. I ran a few numbers in Excel just for kicks, and found $10,000 invested in your twenties at a paltry 3% will grow to over $30,000 by the time you retire at 65. With over $20,000 of “free money” in interest, I can’t really wrap my head around why anyone would do this.

What my silly friend should do: if he needs $10,000 in 2014 to cover expenses, he should pull the money out of his RRSP under the Lifelong Learning Plan and make a plan to pay it back on schedule after graduation.

How my RRSP helped me pay off my student loans, go back to school, and save for the future

Ok guys, RRSPs are getting way too much flack in the Canadian personal finance community. With most people singing the praises of TFSAs, we’re forgetting a financial truth:

RRSPs are still awesome.

…but they’re not for everybody.

(well, they are for every Canadian in a legal sense, but not everybody should take advantage of them all the time)

I opened an RRSP for my 25th birthday, because at my quarter-century existence milestone I was going through this weird phase of feeling “old” and “grown-up”. Now that I’m 28 I realize how ridiculous it is to feel old at 25, but that is the foolishness of youth. My contributions to my RRSP at that time were minimal, because even though I was eager to start saving for retirement, I had figured out enough about money to know an RRSP wasn’t the best savings vehicle for me at that time because of my low income.

Fast forward a year later when my income jumped and I started a job with an employer pension. The mandatory contributions to my employer pension counted as RRSP contributions, because it was money going into a registered retirement account. Employer pensions are rare these days, so most people will have a choice whether or not to contribute to their retirement accounts. However, even if contributions weren’t mandatory, I still would have kept saving in an RRSP.

My income was over $50,000 annually and RRSP contributions helped minimize the amount of income tax I paid.

Paying less income tax meant I got bigger income tax returns back (I never requested my employer reduce my tax rate because with the variable income I was earning from freelance writing & blogging, it was difficult to predict the taxes I would owe, so I erred on the side of receiving a return instead of paying!). Large income tax returns helped me wipe out my massive student loan debt AND allowed me to boost my savings and investment accounts.

Consequently, not only did I have money socked away for retirement, I was able to get out of debt super fast and start investing in the stock market.

RRSPs have always been, and still are, part of my long-term wealth-building strategy. 

If I over-contributed to my RRSP — what I mean by that is, put more money into it than I needed to maximize my income tax return — I carried the deduction to a future year. I don’t even know if people realize you can do this, but you can contribute to your RRSP and claim the deduction in a later year.

I have contributed more to my RRSPs than I’ve claimed in deductions.

And that money is growing with interest and dividends that won’t be part of my deduction. In other words, contributing to my RRSP is earning me some free money. Who would say no to that?

Now that I’ve decided to return to school for my MBA, my RRSPs are a backup plan for funding my degree. I can borrow up to $10,000 per year to a maximum of $20,000 under the lifelong learning plan. This represents approximately half of the entire cost of my degree.

You know what happens when you borrow from yourself to pay for something? 

You don’t go into debt.

Scholarships and savings have spared me withdrawing any money from my RRSP to fund my educational pursuits thus far, but I like knowing I have tens of thousands of dollars on hand if I needed. I won’t need to take a break from my studies or pick up a part time job in order to earn money to pay for my tuition, my RRSP is always available to me and the only person I have to pay back if I use it is myself. Talk about peace of mind!

So I want to take this moment to thank my RRSP for helping me pay off my debt, put money away for when I’m old & grey, and let me go back to school without fear of poverty.

If it weren’t for my RRSP contributions, I’d be way further behind in my debt repayment and savings progress.

When should you NOT contribute to an RRSP:

you earn a low income. As a general rule, the threshold for justifiable RRSP contributions is $50,000 but this depends on a number of factors, namely what other deductions you can claim.

you haven’t maxed out your TFSA. An RRSP is a tax-deferred account, which means you’re going to pay taxes on on the money in the account, just at a later date. A TFSA on the other hand is a tax-free account, which means you never pay taxes on the money in that account. The trade off is you can’t claim TFSA contributions when you file your taxes the way you can claim RRSP contributions. For ultimate tax-minimization, you should try to max out your TFSA before your RRSP, regardless of income.

you don’t like money. If you don’t have a real interest in managing your money well, you want to make the choices that will hurt you the most, and this includes never contributing to an RRSP. Maybe don’t even file your taxes at all, because if you’re going to financially self-sabotage, might as well go all out.

In conclusion, the Canadian PF community has to stop slamming RRSPs like they’re financially toxic and recognize some of the benefits of putting money away in these accounts.