Save in RRSP or TFSA if I have a Government Pension?

[Callie]

Hi everyone!

I am fairly new here and as a result of reading threads here I have decreased (although not entirely eliminated) paying extra on my mortgage. Therefore I have some extra money to invest in retirement saving accounts. My husband and I are both 28 years old and have been doing okay at saving for retirement but based on reading this forum we could be doing better. We don't plan to FIRE as early as a lot of people but I think it would be nice to retire at around 55 (my husband doesn't want to retire early at all).

Current Retirement Savings
My RRSP                    $60,000
Husbands RRSP         $15,000
Husbands Work RPP  $40,000

We are both teachers and previously we were working at a private school but we have now switched to the public system. My question is we are both working in British Columbia and therefore are entitled to a government pension when we retire. I have ran the pension calculator putting in conservative numbers - assuming we will work as teachers for 27 years at 85% workload (rather than the standard 100%) and we would each receive $1000/month in pension income.

Our annual salary is 56,000 based on the salary grid for our district. However, for this current school year I was just recently hired for the remaining 4 months. Next year it is likely we will both start off the year with full time contracts as the schools are in desperate need of teachers due to contract negotiations.

I have read a lot of articles that since teachers receive a government pension they shouldn't use RRSP as they will be hit with large amounts of tax later on/ result in claw backs of old age benefits. However, I am reluctant to trust these articles as they also state that teachers don't need to save individually at all since their pension will take care of them, which I don't believe.

So I am looking for more opinions. Should we continue to save for our retirement using RRSP or should we switch our focus to TFSA?

Please let me know if you need any more information.   

[Heckler]

Assuming both equal incomes, each growing similarily (ie, she doesnt become a Principle and he doesnt stay at home dad), i would contribute to equalize your RSPs, so you can draw equal incomes from them.

Assume you have 40k taxable household income needed for life, thats $12k+12k pension and another 8k needed from each of your RSPs to supplement pensions.

Using 4% rule, you each need a plan to get $200k in RSPs to make that last forever.  The rest goes to max TFSAs.  With relatively low incomes, TFSA or RSP will have similar long term tax benefits, but I would balance the two.

Granted, this is a back of the hand calculation in my phone from the airport terminal Ive been sitting in for 18 hours after 48 hours or so if travel.  No warrantee implied on the math!

[Heckler]

Mind you, if you live in Vancouver, you will need to be super thrifty to live on a $40k taxable family income.

[PharmaStache]

1k/month seems SUPER low.  Are you positive about that number?  Is that not including pay grade increases or something?  What's your highest income going to be- 90k or so? 

I would for sure max out both your TFSAs (couch potato style).  Save that RRSP room for when your salaries are higher. 

[Space Pickle]

Hi, I teach in Ontario. It can't possibly be 1000/month for 27 years of service...the pension plan must be assuming that you never get a raise.

[Stasher]

I would for sure max out both your TFSAs (couch potato style).  Save that RRSP room for when your salaries are higher. 

Yup... put every single dime you each have into your TFSA accounts and max them out as aggressively as you can. At $56,000 income per year the benefits of the TFSA far outweigh the tax deferment of the RRSP.
Go here and do what feels comfortable for you http://canadiancouchpotato.com/model-portfolios-2/
I personally would say set-up a self traded brokerage account at whatever bank you like and buy Vanguard ETFs for your TFSA

Don't forget at 65 you should each safely get around $500/month for CPP and will be getting $549 each for OAS.
So add your Pension (as mentioned you may be low balling yourself) $1000x2 + $500x2 + $549x2 = $4100/month x12 = $49,200 per year which doesn't even include any of the TFSA and RRSP savings you will possible have at 55 when you plan to retire from teaching.

[Callie]

1k/month seems SUPER low.  Are you positive about that number?  Is that not including pay grade increases or something?  What's your highest income going to be- 90k or so? 

I would for sure max out both your TFSAs (couch potato style).  Save that RRSP room for when your salaries are higher.

I went back and looked at the calculator again. I am not sure what assumptions the calculator make in terms of pay raises but we will max out at around 78k. However, I assume it is the best calculator to use as it is provided by the Teacher's Pension Plan.

When I looked at the calculator again it actually has to pension amounts prior to 65 and after 65

My pension prior to 65 would be      $1,752/month
My pension after 65 would be               $1,109/month

My husband would receive similar amounts as well.

It  might also be a lower amount as you can chose to have survivor benefits or not. I have made the assumption we would want full survivor benefits but that could change in the years closer to retirement. 

[GreatLaker]

Maybe you know this already but the pension amount before 65 includes a bridge amount intended to provide a greater amount up to 65 when CPP kicks in then it drops by approx the CPP amount so your income is level before and after age 65. It's very common in public sector and union pensions.

RRSP vs. TFSA. In general if you expect your marginal tax rate to be higher when you are withdrawing the money then TFSA is a better choice. If you expect marginal tax rate to be lower when withdrawing then RRSP is a better choice. You can check the tax tables at TaxTips.ca to estimate tax rates before and after retirement:
http://www.taxtips.ca/taxrates/bc.htm

OAS starts to get clawed back on individual income above about $73k at the rate of 15% of the amount your income exceeds that threshold and it's all clawed back by about $118k of income. Both those amounts get annually indexed to CPI. So unless you expect your income to be above $73k in today's dollars, your OAS won't be affected.

The complicating factor is in the year you turn 72 you will be required to convert RRSP to RRIF and make mandatory minimum withdrawals that start around 5% of the RRIF amount and increase slowly from there each year. So if all your income (pension, CPP, OAS, interest, capital gains, grossed-up dividends PLUS mandatory RRIF withdrawls) is above ~$73k some of your OAS will get clawed back. You can minimize or eliminate that clawback by withdrawing some funds from your RRSP after retirement but before age 72... paying more tax earlier, but less overall. Plus your pension contributions (yours and employer contributions) will result in pension adjustment that will limit how much RRSP contribution room you have anyway.

In my case I maxed out my RRSP, but from retirement at age 60 to age 71 I will withdraw from my RRSP about 1-2% of the total value annually, so by the time I reach age 72 my mandatory withdrawals will be low enough to avoid OAS clawback.

Another complicating factor is if one spouse passes away first, then the RRSP or RRIF amount goes to the surviving spouse, which could bump up their tax bracket considerably and increase OAS clawback. But to avoid that you need to make projections about lifespan.

In my experience concerns about putting too much in an RRSP resulting in higher taxes and OAS clawback are created from fear rather than facts. As I said I have maxed my RRSP and through some careful financial management should be able to be in a much lower tax bracket and avoid OAS clawback in retirement. But everyone's different, so check the following links and estimate your own situation.

Here are a couple of good links:
https://retirehappy.ca/understanding-the-oas-clawback/
http://www.finiki.org/wiki/Old_Age_Security

Taxes are complicated, especially when it comes to investing, so if you have more questions, ask away.

[RichMoose]

Current Retirement Savings
My RRSP                    $60,000
Husbands RRSP         $15,000
Husbands Work RPP  $40,000

I have read a lot of articles that since teachers receive a government pension they shouldn't use RRSP as they will be hit with large amounts of tax later on/ result in claw backs of old age benefits. However, I am reluctant to trust these articles as they also state that teachers don't need to save individually at all since their pension will take care of them, which I don't believe.

So I am looking for more opinions. Should we continue to save for our retirement using RRSP or should we switch our focus to TFSA?

Please let me know if you need any more information.

You are almost certainly better off to invest in TFSA accounts. Properly invested, with no new contributions your RRSP should be worth around $300,000 and your husbands $270,000 (assuming he takes control of the RPP). Both of those are inflation adjusted. That should spin off $10,000+ each in fully taxable annual income. If you continue investing in RRSPs at $5000 per year each for example, your RRSP values will have exploded to around $600,000 each. That spins out $24,000+ in fully taxed dollars.

Something might not be correct about your pension calculations, because most pension plans are designed to pay out approximate 2% of annual best 5 salary per year worked. If you work 27 years under the plan, that's 54% of $56,000+, or $30,000 per year. Add in your $24,000 incomes for RRSPs and you're at $54,000 a year in fully taxed income. $108,000 comined. That could spell RRIF trouble down the road.

I actually wrote an article about this a couple weeks ago: http://therichmoose.com/post20170215/

It basically found little difference between RRSPs and TFSAs from a pure financial perspective, but the TFSA is way more flexible and often carries a slight financial advantage. I say as a general rule, you are almost certainly better off contributing to a TFSA first unless your individual taxable income is greater than $92,000. At which point if you're even moderately badass you should be maxing out both. :-)

[Heckler]

I actually wrote an article about this a couple weeks ago: http://therichmoose.com/post20170215/

It basically found little difference between RRSPs and TFSAs from a pure financial perspective, but the TFSA is way more flexible and often carries a slight financial advantage. I say as a general rule, you are almost certainly better off contributing to a TFSA first unless your individual taxable income is greater than $92,000. At which point if you're even moderately badass you should be maxing out both. :-)

Moose, I've got a topic request for you.  We will soon have two maxed TFSAs and still plenty of RSP contribution room we can max in the next 8 years.  Do I use RSP or taxable then?  Not too much information out there on that decision.   The americans in the room are happy going with taxable accounts, but I have 20 years of accumulated 15% of AGI room.   

[Retire-Canada]

Moose, I've got a topic request for you.  We will soon have two maxed TFSAs and still plenty of RSP contribution room we can max in the next 8 years.  Do I use RSP or taxable then?  Not too much information out there on that decision.   The americans in the room are happy going with taxable accounts, but I have 20 years of accumulated 15% of AGI room.

There are two questions to answer with the RRSP:

1. Will I see a marginal tax rate benefit?

2. What is my max RRSP value target so my mandatory withdrawals are not too high at 71?

The first question is relatively easy. If your current income is higher than your planned FIRE income I would add money to your RRSP until you get down to the the same level. Your RRSP gives you a tax benefit equal to the difference in the contribution marginal tax rate and the withdrawal marginal tax rate. If the tax marginal tax rates are the same at contribution and withdrawal the RRSP is equivalent to a TFSA in that there is no tax benefit, but the gains on the principal can grow tax free. With the TFSA you pay the tax now with the RRSP you pay your taxes later.

To answer the second question I'd do the following:

1. figure out your FIRE budget
2. figure an estimate of your CPP & OAS
3. determine any other pension benefits you will get
4. then your max mandatory withdrawal target value = FIRE budget - CPP - OAS - other pensions [let's say it's $45K - $7K - $7K - $0K = $31K/yr]
5. take your mandatory withdrawal target value and divide by the required mandatory withdrawal % at 71yrs which is currently 5.28% [$31K/5.28% = $587K] this is your Max RRSP Value at 71
6. use cFIREsim or a spreadsheet to project the growth of your RRSP between now and 71 factoring in your pre-71 withdrawals to see if you are likely to be over or under this amount
7. If you  are under keep adding to your RRSP
8. If you are over stop adding to your RRSP and perhaps increase your planned withdrawals

I plan to withdraw from my RRSP only when I FIRE until such time as my projections for its value are below my Max RRSP Value at 71. Currently I'd be way over if I don't attack my RRSP pretty aggressively between FIRE and 71. If I get amazing returns I'll have to raise my withdrawals to keep the total RRSP value in check and if I get poor returns I may need to use my TFSA or Non-Registered accounts to meet my FIRE spending needs.

[Retire-Canada]

So I am looking for more opinions. Should we continue to save for our retirement using RRSP or should we switch our focus to TFSA?

Please let me know if you need any more information.

See my response to Heckler as it applies to everyone looking at the choice between the RRSP, TFSA and Non-Registered accounts.

How much can you put in your RRSP each year? My GF has a BC Gov't pension and due to her pension contributions she has very minimal RRSP room each year [like $5K on a $100K income]. This may make the question moot as your may not have much RRSP room to work with.

[RichMoose]

Moose, I've got a topic request for you.  We will soon have two maxed TFSAs and still plenty of RSP contribution room we can max in the next 8 years.  Do I use RSP or taxable then?  Not too much information out there on that decision.   The americans in the room are happy going with taxable accounts, but I have 20 years of accumulated 15% of AGI room.

Already completed rough drafts be posted in a few weeks. :-)

It's a very individual equation that depends on income, personal goals, retirement spending, and expected full tax income in retirement (ie. Pensions + CPP + OAS).

For early retirees contributing to RRSPs is a slam dunk because you can bleed the RRSP accounts down at relatively low tax rates before getting your CPP/OAS and especially RRIFs. Then there are other tricks to lower tax rates that increase risk, such as borrowing to invest just enough to offset RRSP income.

For the average 65 retirement, I would say a properly invested taxable account where you only defer capital gains is probably best in many cases. Investing in products like HXS.TO, HXT.TO, , HBB.TO, and finally HXX.TO.

Keep reading my blog because I will be explaining it all in there over the next few months. How's that for bait? :-D

[Heckler]

I'm looking forward to it.  We've got $450k each projected at 71 with lots of room left in RSP and no taxable or pension, so I'll stick with the plan for now.   Still have 28 years of spreadsheet refinement before then.

[SweetLife]

Following this :)

[human]

Now that you have a pension I think you'll find the rrsp room drops a lot. My pension adjustment didn't seem to get worse as my salary slowly went from 55k to 105 in the fed gov.

I think over 25 years you should be able to max both. I like maxing the rrsp to have more to invest now (because I pay less tax now) but because of my salary I max both rrsp and tfsa so there really isn't a choice to be made.

 Since my salary is equal to both of yours and you probably less tax I don't see why you can't fill both.

[Goldielocks]

TFSA for certain, right now.

Your RRSP room is quite low, because of pension adjustements, so save your RRSP investing for after you max out your TFSA,  and / or you start to have a high income (e.g., after 15 years, I believer you can top out at $90k plus in teacher salaries!!).

ETA -- this is the same response as human..