Simplifying and Improving Our RRSPs: a Review of the Progress Made Over 4 Years

It’s amazing how much more time you have once your children are in school and the eldest is old enough to be left “home alone” even if only for a 5-minute bike ride to the mailbox. When we reached this milestone in parenthood, I finally had the time to start looking at where our money was and why and deciding what changes were needed. One of the first messes that needed to be cleaned up was our RRSPs: It’s taken 4 years to simplify and improve our RRSP holdings but things are progressing well.

What We Started With

Four years ago I wasn’t even sure

  • where our RRSP money was,
  • how much was in each place,
  • what the rate of return was on the money, and
  • whether we should be doing something differently with it.

I read a few books about RRSPs and one piece of advice struck home immediately.

Why You Should Always Designate a Beneficiary for Your RRSP

Four years ago, we already had our wills and the wills designated that my husband and I will inherit each other’s assets if one of us dies. What I didn’t know, though, was that if a RRSP has a designated beneficiary, the value of the RRSP is not included in the amount that the government uses to calculate the probate fee or, as Ontario now calls it, the Estate Administration Tax.

For example, say I had $100 000 in my RRSP and I died. If my RRSP did not have a beneficiary named, that $100 000 would be added to my other assets and that total amount would be taxed by the Ontario government as a condition of probating my estate. If my other assets were worth, say, $50 000, the government would charge an Estate Administration Tax of $1 750.

If I had designated my husband as the beneficiary of my RRSP, he would not have to include the $100 000 value of my RRSP in the amount used to calculate the estate administration tax. That means the tax would be calculated based on the other $50 000 in my estate. The total payable would be $250.

That’s right. He would not have to pay $1 500 in tax.

Just for having his name on a slip of paper filed at the bank!

So the first thing I did was get a Beneficiary form filled out and properly filed for each of our RRSPs.

Neither of us has died yet but it still feels like we’ve saved thousands of dollars.

Where Our RRSP Money Was

We had quite a collection of RRSP accounts 4 years ago.

I eventually determined we had

  • a RRSP invested in mutual funds and GICs at CIBC
  • another RRSP in a GIC at CIBC
  • a RRSP each holding Canada Premium Savings Bonds in the Canada Retirement Savings Plan
  • a RRSP each in GICs and cash at ING Direct (now Tangerine)
  • a spousal RRSP in GICs at ING Direct (now Tangerine)
  • a locked-in RRSP at BMO in GICs and high interest savings accounts
  • a RRSP at BMO in mutual funds and GICs
  • a RRSP at BMO in a high interest savings account

Argh! Can you see why I desperately needed to fix this up?

For anyone who is deadly curious, the mutual funds included

  • index funds mirroring the performance of the TSX and the NYSE (purchased before ETFs existed)
  • funds holding mortgages
  • funds holding bonds in Canada, the USA and internationally

Where Our RRSP Money Is

We are not finished consolidating our RRSP holdings yet. Unfortunately, you cannot simply transfer GICs from, say, CIBC to CIBC Investor’s Edge. Don’t ask me why. I’m pretty sure it has to do with making the bank more money at our expense, though.

Still, it’s looking a bit better:

  • a RRSP each at BMO InvestorLine
  • a LIRA at BMO InvestorLine
  • a RRSP at CIBC Investor’s Edge
  • a spousal RRSP at RBC Direct Investing
  • a GIC RRSP at CIBC that we will be able to transfer to Investor’s Edge in 2015 on maturity
  • a GIC RRSP at Tangerine that we will be able to transfer to BMO InvestorLine in 2015 on maturity

The CIBC Investor’s Edge RRSP could be consolidated with one of the BMO InvestorLine ones, but to avoid paying transfer fees it’s best to wait till the GICs at CIBC mature and the money can transfer fee-free up to the Investor’s Edge account. Then, if desired, the entire amount can transfer out to InvestorLine. Or, conversely, the InvestorLine account could transfer in to Investor’s Edge. That would bring us down from 10 accounts to 4.

The spousal RRSP is at RBC Direct Investing primarily so I could investigate their trading platform in more depth! It could be transferred out at any time but I’m happy to keep it there. As a spousal it cannot combine with any other RRSP so it really makes little difference which brokerage it is kept at. (All of our RRSPs qualify for the lowest trading commissions etc at their respective brokerages.)

The optimization of the holdings within the RRSPs continues. I’m sure it will be the subject of more articles in the future.

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Did you make the mistake of opening a new RRSP at a different bank each time you moved? Did you ever despair and refuse to read your RRSP mutual fund statements for over a year? Please share your RRSP escapades and foibles with a comment.

Do I Want my Retirement Income to Come From Dividends and Interest or Capital and Growth?

For many years, I hoped to retire on the income generated by our fixed income investments. Since 2008, however, the rates paid by these types of investments have drifted down so low I’ve had to re-consider our options. I’ve been trying to decide whether we now intend to retire on income from our dividends and interest payments or whether we intend to live off primarily the capital gains and principal generated by selling part of our holdings: and I need to understand how that will affect what we choose to invest in now before we retire.

Do You Plan on Living Off What Your Capital Earns or on Living Off the Capital Itself?

Yes, I know that if you are planning to live off of the capital itself, you will most likely be living off a blend of the income that capital earns and the capital gains it makes. Your income might be a combination of dividends, interest, capital gains and liquidated principal.

However, the broader question is: do you intend to spend your capital in retirement to live on? Or do you hope to die with that capital intact, leaving it as a legacy to your relatives, friends or deserving others including charities?

What Family Experience Can I Draw On to Evaluate the Options?

This is a question many of my older relatives have faced. In general, since there are no hugely wealthy people in our family tree, their capital has been mostly invested in their homes.

The only practical ways they could access that capital were

  • via selling their home and renting or moving in with a relative or friend, or
  • by taking out some form of loan (C.H.I.P., HELOC etc.) that had to be re-paid when the home was sold.

We’ve had relatives who did access the home ownership capital and use it and others who kept their home in reserve in case they needed the capital to pay for long-term end-of-life care.

A small minority of my relatives had additional savings. Some of them have not touched the principal of those savings but have used the income that they generate to supplement their pension income. An even smaller minority has gradually spent those savings.

Looking at various family members’ retirements, I’ve tried to see what would work best for us. It’s complex because different people retired into different world situations and financial times. Some had no work pensions. Others had defined benefit pensions. The only common thread is none of them were reckless spenders.

Retirement Spending Plans Can Change With Age

One thing I did notice is that the older people grew, the more reluctant most became to spend. They had all seen friends and relations end up needing expensive end-of-life care. They had seen some whose finances could not stretch to provide the care they would have preferred. Home care, for example, is often the most expensive type of care for most people because almost none of the costs are covered by the government. The quality of nursing home you can afford is also often dependent on how much money you have to buy additional services or to provide care elsewhere while you wait for an opening to become available at a favoured location.

For that reason, many of them would not consider selling their house or getting a loan against the value of their house. They were counting on their houses to provide a small nest egg to pay for care should the need arise.

Others also became reluctant to change homes because the familiarity and proximity to life-long friends provided great comfort.

These observations led my husband and I to the knowledge that if we intend to move to free up some of the value of our current home, we’d better plan on doing it near the beginning of our retirement before we become too risk averse.

Can You Count on Funding a Retirement from Capital Gains?

There are various types of capital gains. The gain comes if you sell something for more than you paid for it. In theory, you could then use the gain for income and re-invest the original principal in something that can earn you a second capital gain. In reality, many people use both the gain and the re-gained principal for income. They just sell less of the investment and leave the balance for the next time they need income.

What Types of Investment Can Generate Capital Gains?

You can realize a profit on

  • Stocks and shares in companies
  • Real estate
  • Investing in tangible goods such as coins, precious metals, jewels, art, antiques, etc.

None of these investments guarantees an investor will realize a capital gain when they sell the investment. All of these investments can actually suffer a loss.

Still, some of these investments offer a measure of reassurance when you look at their historical trends. Stock markets generally move up over the long term. Real estate in major cities in Canada has usually gone up in value, although the forces that created that demand in the 1950s are very different from those at work now. Tangible goods have bounced every which way in value but some like precious metals and raw gems have mostly increased in value over time.

Am I assured that investing in, say, stocks will guarantee me a retirement income? No.

But I can’t think of any other type of investment that will guarantee me an income either.

Well I can think of one: Maybe buying an annuity would. That would shift the need to make a steady income from a chunk of capital from me to the annuity issuer. Given the low rates per $100 000 invested in an annuity right now, though, it doesn’t seem like a great solution.

Can You Count on Funding a Retirement from Investment Income?

There’s two parts to this question:

  • Can you stockpile enough investments to earn a sizeable income?
  • How reliable is that income?

What Types of Investment Can Generate a Retirement Income?

Traditional means to create investment income include

  • Dividends from shares and stocks and privately-held companies
  • Dividends from preferred shares
  • Interest income from bank accounts, GICs, Term Deposits, T-bills and money market instruments
  • Interest income from government and corporate bonds
  • Interest income from  private loans and mortgages
  • Return of capital from various investments
  • Distributions of various types from income trusts (There are still some income trusts available including Real Estate Income Trusts (REITs) and food-related trusts such as the Keg, A&W etc.)

How Reliable Is the Retirement Income from These Types of Investments?

Most of these types of investments yield 6% before tax or less on the day you buy them.

Many of these types of investments do not guarantee they will continue to provide the same rate of income.

For example, a 5-year GIC issued today does guarantee your rate of return for the next 5 years; but there is no guarantee that you will be able to negotiate a similar rate of return for the next interval once the certificate matures.

Dividends can also change. Many dividends have a history of slowly growing. They are not guaranteed though and they can be reduced or stopped altogether. And if the issuer goes bankrupt, your principal can disappear along with your income stream.

How Much Do You Need to Have Invested to Earn Enough Income to Retire?

Is it even possible to save and invest enough money to generate an income for retirement?

Say you want $50 000 a year, after tax, in retirement.

Here’s the first cheat: You’re part of a couple. That makes a decent retirement income much, much easier to acquire.

You plan to each receive $25 000 a year after tax. In Ontario that means you’d have to earn about $28 600 a year before tax. (That’s a really rough estimate: you may need less if your income is from dividends in a non-registered account and/or if you have higher deductions for age or disability etc.)

Here’s the second cheat: you include receiving OAS (at age 69) and CPP as part of your retirement income plan. This makes the goal of living off of investment income more plausible.

The maximum OAS payment for someone who has lived in Canada for 40 years since turning 18 is 551.54*12 = $6618 a year. (from the Service Canada website, June 2014)
The average CPP payment 633.46*12=$7601 a year. (from the Service Canada website, June 2014)

Combined that’s $14 219. Each. See why planning for a couple is easier? If you’re not romantically partnered for retirement, you may want to consider whether there is a good friend with whom you’d like to share retirement. Just kidding. Or maybe not?

That means you’d each need to earn an additional 28 600 – 14 219 = 14 381 per year from investments. That’s 28 762 in total.

Say you were earning 6% a year from your investments. As a couple, you’d need $479 367 invested to generate the $28 762.

Of course that’s just for the first year. Then you’ll need to earn more because inflation will start changing the $50 000 income you need. Eeeep.

Still it gives you a ballpark of the minimum you’d need.

If that’s totally unachievable, you may want to skip to planning about how to supplement your income by selling investments and realizing the capital gains and/or living off the principal.

However, saving this much is achievable for us which means I haven’t given up on the income route yet.

A Preference for Funding Retirement from Income Rather than Capital Gains

All this pondering left me back where I started: I would prefer to create our retirement income from dividends, interest and other distributions rather than from realizing capital gains on investments or spending the principal. I imagine that’s what most people would prefer, of course!

So can we do it?

And if we can, how do we get there from here?

That’s what I’ll be exploring more in further articles.

Related Reading

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Do you plan to live off your capital or your income in retirement? Have you been investing strategically to achieve your goal? Please share a glimpse of your plans with a comment.