The Simple Retirement Plan

Owen Winkelmolen

Fee-for-service financial planner and founder of PlanEasy.ca

Simplicity is a beautiful thing.

It’s difficult to keep things simple. Taking a complex process and making it simple is a challenging task. A lot of effort goes into making something simple.

Retirement planning is no different. It can be a difficult and complex process. With lots of estimates, plus difficult calculations, it can be overwhelming. There are multiple income sources like CPP, OAS and pensions. There are multiple accounts like RRSPs, TFSAs, LIRAs, RRIFs and LIFs.

It doesn’t need to be that difficult.

Planning for retirement when you’re young can be as simple as doing one thing. By doing this one thing year in and year out you’ll set yourself up for a solid retirement.

What is the simple retirement plan?

It’s just one thing…

 

Max out your TFSA.

 

That’s it!

Max out your TFSA every year from age 25 to 65 you’ll be in a great place for retirement

Even if you don’t do anything else but max out your TFSA you’ll still have a solid amount of TAX FREE money to spend in retirement. If you and your partner both follow the simple retirement plan you’ll have over $100,000 to spend in retirement each year.

Of course, simple does not mean simplistic. There is a lot of stuff going on behind the scenes. Let’s look at what makes the simple retirement plan so simple yet so powerful.

Simple.

The simple retirement plan is simple. It has one focus. One goal. Max out your TFSA.

Having a SMART financial goal is extremely important. It’s motivating. Maxing out your TFSA (currently $5,500 per year) means putting away just over $100/week. That’s your only goal. Put away $100 week.

Can’t save $100 per week? Start at $50, $20, $10, $5. Doesn’t matter. Contribution room carries forward each year. Work your way up to $100 per week over a few months or a few years, then start to catch up on your extra contribution room.

Starting from zero? No problem. Start at by putting just $1 into your TFSA. Next week increase that to $2. Next week $3. Increase your savings by $1 per week and at the end of a year you’ll be putting away $52 per week. The slow gradual increase gives you time to massage savings into your budget. Its also a great way to build a savings habit. Don’t stop at $52 though. Keep going until you hit $100 per week.

Powerful.

Thanks to the power of compounding the simple retirement plan is very powerful. Investing $5,500 each year, from age 25 to 65, will grow to over $660,000 in today’s dollars. This assumes a real return of 5% per year (that’s after adjusting for inflation).

Having $660,000 at retirement will allow you to withdraw $36,332 tax free each year from age 65 to 95. This assumes a slightly more conservative 4% real return during your retirement years.

From start to finish your TFSA will have earned over $900,000 from your investments. From age 25 to 65 you’ll make $220,000 in contributions and earn $444,399 from your investments. Then, from age 65 to 95, you’ll earn another $461,576 from your investments even though you’re withdrawing money each year.

This is the power of compounding and power of the simple retirement plan.

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Simple Three Fund Portfolio.

Because of the name Tax Free Savings Account many people assume TFSAs can only be used as a high interest savings account. That couldn’t be further from the truth. You can hold all kinds of investments in your TFSA. From stocks to bonds to REITS and GICs. All of these investments can be held in your TFSA.

For the simple retirement plan to work you need to invest your savings each month. Just putting your money into a high interest savings account won’t give you a high enough return. By investing in a mix of stocks and bonds you can maximize the return on your TFSA contributions.

The simple retirement plan assumes a simple investment portfolio of three ETF funds in your TFSA. Two stock ETFs and one bond ETF. That’s it. No complex investments to manage. For more on what ETF’s to purchase visit The Canadian Couch Potato.

Using ETFs, you can buy a lot of different companies in one shot. This is great for diversification. This will help you minimize the risk of investing over the long term. Sure, one company may fail but you’ve got another 500 to 1000 to pull you through.

It’s way less expensive than a mutual fund. ETFs cost a fraction of mutual funds. The cost of the ETFs recommended by Canadian Couch Potato are 1/10th the cost of mutual funds.

It’s free to purchase ETFs. Use a discount broker like Questrade to set up your TFSA account because they also allow you to make free ETF purchases. You’ll only pay a trading fee when you sell, and even those fees are quite small.

“The simple retirement plan uses just one account, your TFSA.”

“The beautiful thing about the TFSA is that there are no taxes. None. It’s so simple.”

No Taxes.

The beautiful thing about the TFSA is that there are no taxes. None. It’s so simple.

Investment growth is tax free. Withdrawals are tax free. Contributions are made with after tax income. No need to worry about tax refunds like with RRSPs. This makes tax planning now and in retirement much easier.

Each year in retirement you’ll withdraw $36,332 entirely tax free to cover your expenses. This is equivalent to withdrawing $42,640 from an RRSP (based on current Ontario tax rates). This saves you over $6,000 per year in taxes.

 

 

Government Benefits.

The simple retirement plan is so simple it doesn’t interfere with government benefits.

Income from a TFSA is tax free and it’s not counted when calculating your government benefits in retirement. No need to worry about Old Age Security (OAS) claw back. You may even qualify for the Guaranteed Income Supplement (GIS).

Average CPP benefits are $8,221 per year (the maximum CPP is $13,370 per year but don’t just assume you’ll get the max). Full OAS benefits are $6,942 per year.

These government benefits alone add another $15,163 in gross income each year (not counting GIS). PLUS! Thanks to retirement tax credits all, or nearly all, of that income will be available for spending each year.

The Simple Retirement Plan.

The simple retirement plan is simple, max out your TFSA. Do that one thing from age 25-65 and you’ll have $51,495 to spend each year in retirement. For a couple, that’s over $100,000 in annual retirement spending!

From start to finish you’ll have made $220,000 in contributions and received over $900,000 from investment gains.

You’ll also have one singular focus…

Max out your TFSA.

Owen Winkelmolen

Financial planner, personal finance geek and founder of PlanEasy.

New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...

New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...

10 Comments

  1. Ms. Frugal Asian Finance

    Thanks for sharing the great analysis. Mr. FAF and I are taking baby steps to build our retirement accounts. It’s always fascinating to hear how compound interest can help someone build wealth over time. =)

    Reply
    • Owen

      Thanks for your comment Ms. FAF. Compound interest is amazing, like a money snowball, just getting bigger and bigger!

      Reply
  2. Jill

    Thanks for the post. I’m 47 and maxing out my TFSA now, but wish they were around 20 years ago to have been able to build as you detail in the post. It’s a great vehicle and I wish I had more time with them.

    Reply
    • Owen

      Thanks for your comment Jill. Maxing out your TFSA now is great. It’ll grow to be a great addition to any existing retirement plan.

      Reply
  3. Miwo

    Hello Owen,

    I am starting TFSA for my children when they can open a Questrade account at 19 years old. I will be buying VGRO from Vanguard. Thanks for the review of using just the TFSA. It will be one ETF and one account for my kids. Sweet.

    Reply
  4. Miwo

    Hello Owen,

    My children are in their late teens. I want them to start a TFSA and invest it into VGRO. (80% global equities/ 20% global bonds). I think this should be able to completely fund their retirements if they live modestly.

    Am I missing something with this extremely simple plan?

    Reply
    • Owen

      Hi Miwo, you’re not missing anything! The only thing to watch is that you cannot directly contribute to another persons TFSA. But what you can do is gift money to your adult children which they can use to fund their TFSAs.

      An annual contribution of $5,500 over 47 years with a real return of 5% (return after inflation is taken out) would grow to $979,657 in today’s dollars.

      Reply
      • Bob Lin

        Great post Owen. Thank you.

        Re you above comment: “you cannot directly contribute to another persons TFSA”.

        My wife isn’t working, and we have a joint bank account. Will we run into problems with the CRA because she has been contributing to her TFSA from our joint bank account; I’m the only one earning the money? If so, how do I gift money to my wife; it seems pointless.

        Reply
        • Owen

          Hi Bob, the CRA doesn’t like it when you contribute directly to a spouses TFSA, so the best practice is to gift money to a spouse and have them contribute to their TFSA from their own bank account, this avoids any confusion.

          If they don’t have their own bank account, then a joint account is the next best thing (but I’m also not a tax lawyer).

          With no-fee online banks its pretty easy to set up a free checking account for your spouse, then TFSA contributions can be made directly from their own account. Either Tangerine or Simplii would work well for this.

          Reply
          • Bob Lin

            Thank Owen. I guess that’s what we’ll have to do then to be on the safe side.

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