Author Topic: Young Canadian Public Servant Looking for Investment Advice  (Read 4422 times)

CanadianMustache

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Young Canadian Public Servant Looking for Investment Advice
« on: December 02, 2013, 03:05:51 PM »
Hi

I am a long-time reader, first time posting.

I am in my mid-twenties and have an indeterminate position with the federal government. If I stay with the government for 35 years, I can collect on my defined benefit pension (70% of best 5 years).

However, I am looking for investment options to give me the option of getting out sooner if I wish to. I like my job for now...

I earn 60,000 per year currently and my only debt is a student loan of 22,000, that I am attacking with a vengeance.

I don't want to post all my numbers, but am hoping for some guidance in the investing department.

At the moment I am putting extra money in a general tax free savings account.  If I stay with the government the RRSP isn't the best vehicle for me because I could have a retirement income of 70,000 per year through the pension and be taxed more than the average person for RRSP withdrawals...

Any help appreciated...


Peter

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Re: Young Canadian Public Servant Looking for Investment Advice
« Reply #1 on: December 02, 2013, 03:24:54 PM »
Your thoughts on RRSP are at odds with you MMM desires. You won't be working for the government until you're 60 if you save with MMM efficiency, and you won't be collecting that juicy pension.

Don't let the "higher income in retirement" talk scare you from the RRSP. It is in almost every conceivable situation way better to use than a taxable account.

The point is trivial though, as your RRSP contribution limit must be quite small due to the pension adjustment. And since you're saving a good chunk of your income (right?) your non RRSP savings will be a much bigger percentage of your investment portfolio in no time.

plainjane

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Re: Young Canadian Public Servant Looking for Investment Advice
« Reply #2 on: December 02, 2013, 06:34:39 PM »
I don't want to post all my numbers, but am hoping for some guidance in the investing department.

At the moment I am putting extra money in a general tax free savings account.  If I stay with the government the RRSP isn't the best vehicle for me because I could have a retirement income of 70,000 per year through the pension and be taxed more than the average person for RRSP withdrawals...

When you say "a general tax free savings account", do you mean you've just got TFSA money in a cash savings account?  If so, you might want to look at the Canadian Couch Potato investment distribution - http://canadiancouchpotato.com/model-portfolios/

And if you don't want to deal with a brokerage or managing the balancing of mutual funds yourself, look at ING's Streetwise - http://canadiancouchpotato.com/2013/09/12/the-one-fund-solution/

Ishmael

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Re: Young Canadian Public Servant Looking for Investment Advice
« Reply #3 on: December 03, 2013, 05:18:28 AM »
I'm not sure he federal government is the best place if you have a desire to retire early. That pension is definitely a set of golden handcuffs. Not sure how to link directly to a post but here's a bit more detail I posted in another thread. Note that I'm on the grandfathered pension plan though. https://forum.mrmoneymustache.com/ask-a-mustachian/if-your-job-offered-a-pension/

However, there are some other benefits to the federal government that help balance out the negatives - the biggest one is decent vacation entitlements. Being able to take 2 x 3mos and 2 x 1yr off without pay is a great benefit, especially when combined with decent vacation times and holidays, etc. that would help you get through.

Definitely max out your TFSA. I'm not saying this the best idea but if I was in your shoes I would definitely consider holding significant portion of high risk/high reward type investments in there. You're in a position where you can handle risk and have a long time horizon. No matter how much that money grows to, you don't have to pay taxes on it.

Also you could contribute to your RRSP to fund those leave without pay blocks, if nothing else. It would still be a good idea to have, because 35 years in the federal gov't is a long time and a lot could happen (for instance, our country could remain collectively insane and vote in Cons repeatedly over the years).

Another point is that the pension has a transfer value. Its value is magic, and you can't really work that amount into your financial plan. However, at some point it might be large enough to walk away with. A chunk of it will be taxable though, so it would be really helpful o have RRSP room at that point.

So, there are a few different approaches to take:
  • Work to 60, taking as much time off as possible along the way.
  • Carefully contribute to your RRSP, always leaving room for the pension transfer amount outside of tax limits. Retire when your RRSP + TFSA + Pension Transfer Value this your magic number, and manage your money yourself.
  • Consider your pension entitlement at 60 as part of your overall plan, and save enough money in your RRSP/TFSA to a) cover your living costs from retirement age to 60; and b) top up your pension amount from 60 onwards. cfiresim.com is a good tool for helping figure this one out.

Another point worthy of mention is that if you are married, your spouse is only entitled to half of the pension. Factor that into your financial planning.

CanadianMustache

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Re: Young Canadian Public Servant Looking for Investment Advice
« Reply #4 on: January 23, 2014, 02:03:29 PM »
Thanks all for the helpful advice!

sleepyguy

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Re: Young Canadian Public Servant Looking for Investment Advice
« Reply #5 on: January 24, 2014, 09:29:33 AM »
Fellow Canadian here as well.

You are just starting your career... don't count on staying at one place for 30yrs.  But I agree, RRSP would be pointless if you stayed the entire 30yrs.  It would come in handy if say, you're on parental leave and withdraw though, since Canadians have 1yr, that's what my GF did.   Also if you wanted to leave and go private sector RRSP usually not a bad idea... just sometimes it's pointless, as in your case if you stay the entire 30.

You'll want to max out or TSFA and put whatever else into other areas (nonreg, realestate, etc).  Obviously debt as well.

Congrats on a good well paying job at a young age.

Posthumane

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Re: Young Canadian Public Servant Looking for Investment Advice
« Reply #6 on: January 24, 2014, 09:58:50 AM »
I don't agree that the RRSP is pointless. True that your contribution room is small due to the pension adjustment, but max it out anyway if you plan to retire before 60. That way you just defer your pension payments until you hit 60 (or 65 if you started with the gov't within the past year) and use your RRSP for funding those in between years until your deferred pension begins. You could take the transfer value at any time, but the amount that is within your RRSP contribution limit has to go into a locked in retirement account which you can't deduct from until a later age (don't remember the age specifically).

I'm in the same boat as you, and that is my plan. I am maxing the TFSA and RRSP, and if I can stay on for 15-20 year I will retire at 40-45 years of age. This will leave me 15-20 years to live off of RRSP, TFSA, and taxable investments until my pension kicks in at 60, which will equal 30-40% of my best 5 year income. Definitely not golden handcuffs. :)

jaivee

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Re: Young Canadian Public Servant Looking for Investment Advice
« Reply #7 on: January 24, 2014, 02:49:52 PM »
I totally agree that tax free accounts should always be maxed out.  Sometimes though it's a question of when or which tax free account.

When starting out and making an income in a low tax bracket (not OP situation) it may be advantageous to not contribute into your RRSP and save the contribution room until your income is bumped up to higher tax brackets.  In those cases I would forgo the immediate refund, invest in the TFSA and save the RRSP room for a bigger refund in the future.

daverobev

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Re: Young Canadian Public Servant Looking for Investment Advice
« Reply #8 on: January 24, 2014, 04:21:09 PM »
Remember, also, that unregistered dividends from Canadian companies are treated very favourably. I like DRIPping but a Canadian Index ETF unregistered is close to the same as being in a TFSA. If you want unregistered, Canadian companies are what should be there.

 

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