You Don’t Need An RRSP To Retire

Owen Winkelmolen

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

When it comes to retirement there is a lot of focus put on the RRSP. The Registered Retirement Savings Plan seems like an obvious choice for retirement (it even has retirement in the name after all!). But for many of us an RRSP isn’t necessary, and it might even be counterproductive!

There’s a new retirement account on the block and it’s called the TFSA. Just over 10 years old, the TFSA is relatively new to the retirement savings game. Starting in 2009, it changed the way we look at retirement savings.

If you’re new to RRSP vs TFSA debate, it’s important to know that there are pros and cons for each account. RRSP’s do have the advantage in a few different areas, especially if you have high income or have a family and receive child benefits (either the Canada Child Benefit or a provincial child benefit). TFSA’s also have their share of benefits too. For low- and middle-income households, the TFSA has a few big advantages.

When deciding which is the right one for you need to look at multiple factors. Factors like income taxes, government benefits, creditor protection, and even human behaviour.

When deciding between the TFSA or the RRSP the key thing to remember is that you don’t actually NEED an RRSP to retire. Someone can easily retire with only a TFSA.

There are four things you need to know if you’re going to avoid the RRSP and only use the TFSA for retirement.

  1. Start Early
  2. Max It Out
  3. Invest Wisely
  4. Maximize Benefits

 

Want help? Reach out to us and we’ll help you decide between the TFSA and the RRSP. Complete the client discovery survey and we’ll e-mail you to book a free 30-minute discovery session with a fee-for-service financial planner.

 

 

Start Early

If you’re going to use your TFSA for retirement, starting early is key.

You can only contribute a certain amount to your TFSA each year. This is mean to prevent people from taking advantage of the tax-free investment gains. But, once you contribute to your TFSA, any investment gains inside the account will increase your tax-free room and there is no limit to these gains!

The earlier you start contributing to a TFSA, the more tax-free room you create.

Think of your TFSA like a balloon. Everyone starts with an uninflated balloon. When the investments inside your TFSA grow in value it’s like a small amount of air gets added to the balloon. Each year as your investments grow inside the TFSA more air gets added. The earlier you start investing inside your TFSA the larger the balloon becomes.

How big a difference does starting early make?

*All figures are in today’s dollars. They’ve already been adjusted for inflation.

A single $6,000 investment at age 18 will grow your TFSA to $59,435! Almost 10x!!!

A single $6,000 investment at age 28 will only grow your TFSA to $36,488.

A single $6,000 investment at age 38 will only grow your TFSA to $22,401.

Sometimes starting early isn’t an option. The good news is that TFSA contribution room carries forward each year. So, if you can’t start early then the next best thing is to start now. This assumes a 5% real return (after inflation).

 

 

Max It Out

Another powerful way to use your TFSA for retirement is to max it out each year. This means making contributions of about $100 per week. You don’t need an RRSP for retirement as long as you can find around $100 per week to maximize your TFSA each year.

Maxing out your TFSA will help grow your TFSA  even faster. These contributions will grow your tax-free investments to incredible amounts.

Presently the TFSA limit is $6,000 per year for anyone over the age of 18.

How much can you gain by maxing out your TFSA each year?

Regular $6,000 investments from age 18 to 65 will grow your TFSA to $1,122,152!

Regular $3,000 investments from age 18 to 65 will only grow your TFSA to $561,076.

Regular $500 investments from age 18 to 65 will only grow your TFSA to $93,513.

The difference between each level is about $50 per week. It’s amazing what small changes to your budget can do over a long period of time. This is why it’s so important to start tracking your spending and build a basic budget. This assumes a 5% real return (after inflation).

Related: Download our FREE spend tracker and budget template.

 

 

Invest Wisely

The name “Tax Free Savings Account” is a bit misleading. If you’re using your TFSA as a savings account you’re not getting its full potential. The best way to use your TFSA for retirement is to use it as an investment account. By holding investments inside your TFSA you can get returns much higher than a regular savings account.

With higher returns there is higher risk, so for certain goals this isn’t the best strategy, but when you’re saving for retirement you have time to wait out dips in the stock market. Over a long period, these dips will give way to larger returns.

A well-diversified portfolio of low-cost ETFs can produce as much as 6-8% each year (equal to about 4-6% after inflation).

Investing wisely will help grow your TFSA even faster.

 

 

Maximize Benefits

One of the biggest benefits of a TFSA is that it won’t impact government benefits in retirement. This isn’t the case with the RRSP. If you use an RRSP for retirement, any withdrawals you make will decrease your government benefits.

For low and middle income seniors, the impact of these claw backs can be huge. Each $1 withdrawal from an RRSP can reduce benefits by 50-75% for certain income ranges!

But, TFSA withdrawals aren’t considered taxable income, and based on the current claw back rules this income WILL NOT reduce government benefits.

Avoiding the RRSP and using a TFSA for retirement will let you avoid these 50-75% claw backs on government benefits. This can make a huge difference in your overall retirement income.

Related: The hidden tax rate, government benefit claw backs explained.

 

 

You Don’t Need An RRSP To Retire

Although it’s called the Registered Retirement Savings Plan the truth is that you don’t need it to retire. Focusing on the TFSA can provide more than enough income for a luxurious retirement.

For certain low and moderate income families, the TFSA can actually provide MORE income in retirement than an RRSP would.

If you’re going to use your TFSA for retirement the key is to start early, max it out, invest wisely, and maximize government benefits. If you can do those four things you’ll have a well-funded retirement and not have to touch an RRSP even once!

PS. Read about our goal to have $1M in our TFSA by age 55!

 

 

Don’t decide on your own. Reach out to us and we’ll help you decide between the TFSA and the RRSP. Complete the client discovery survey and we’ll e-mail you to book a free 30-minute discovery session with a fee-for-service financial planner. We might be able to save you $1,000’s in taxes and benefits, ask us how.

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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...

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