Author Topic: Investing stuff  (Read 2302 times)

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Offline AbdullahD

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Investing stuff
« on: January 30, 2018, 20:38:08 »
Hey guys.. time to  ramble about another field I enjoy lol

It is an investment "theory" I guess you could say that I have chatted with a retired stock broker and a co worker who has been trading for a long time, to vet a little bit. Also if you look up draw bridge finance on youtube he sort of touches on it, but misses the mark a bit. Any rate here it goes...

RRSP are essentially evil or neutral at best for wealth building, but "ok" for retirement planning.
Point 1; tax brackets rarely change in any serious way pre and post retirement due to A) rising tax rates and B) retirees are used to certain level of income so they maintain it.
Point 2; the tax you save in your wealth building years, is off set and turned negative due to the tax you pay upon withdrawl.

So the two major scenarios are A) wealth building and B) retirement. I used an arbitrary model with the same controls (I just wanted one account to hit one million wether the returns are realistic or not is not important to the argument lol), the controls were $3,000/mo invested out of income, rrsp model gets $949.67/mo extra as a dollar cost averaging addition due to income tax break and if pension exists it was placed as 50% of best 5 years. I assumed the subject made $100,000 per annum and in retirement wished to maintain that. I also used a hybrid model assuming you only put in enough money to drop out of the highest tax bracket and adjusted rrsp contributions accordingly.

So the accounts ended up the NRSP having $779,918 the RRSP plan having $1,026,806 and a TFSA, RRSP and NRSP hybrid had $854,574. So dollar wise the RRSP by far had the most amount of monies but once you factor in the tax you pay upon withdrawl it only had $132,367 excess, whereas the NRSP had an excess of $172,412. The hybrid model just slightly eeked out the NRSP model but I lost the numbers on that one.. Any rate it barely took the lead by a negligible margin if I recall correctly. Now I considered this to be my wealth building model and excluded the pension, so my next model i did just to meet retirement minimums (variances were tighter of course due to pension).

Hybrid model contributions of $17,606 out of pocket or $14,159.9 if using rrsp kickback. This model ends up paying $4017.98 taxes per year and needs $357,471 for the fellow to retire.

NRSP Model contributions of $15,554/yr, no taxes paid and needs $315,806 for the fellow to retire.

And lastly the RRSP model needs contributions of $20,925 out of pocket or $14,193 if using rrsp kick backs, pays $10,516.08 in taxes a year and needs $424,854 to retire.

So if we rank due to out of pocket expenses the hybrid comes in first only needing $14,159.9, then the RRSP model at $14,193 and then the NRSP model at $15,554. But due to no financial advisor should be telling you to only invest the minimum to retire the differences between the RRSP model and NRSP model become far closer say akin to the wealth building model.. the say $1,400 difference per year realistically only being just over $100 I feel I can safely say most would throw the extra in but this is an academic debate there lol

My feeling is people should drop the misplaced emphasis on the RRSP and adopt a Hybrid investing approach due to A) the dollar sign you need to meet is less and therefore psychologically easier to obtain, B) you want to live life and by maximizing your dollars being put to work you can live easier now and later and lastly.. it's always safer to have more just in case xyz happens.

Now admitted flaws that I did not account for 1) forgot to calculate taxable gains 2) medical expenses in retirement reducing taxable income and 3) I am not a tax or investment advisor so I could have missed things.. But this is simply an exercise I had fun with.. Any opinions or criticism?

Posting here because I know a lot of you have pensions and because I am interested in what you guys read into it.

Abdullah

Ps it's that time of year 😂😂😂

Offline NavyShooter

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Re: Investing stuff
« Reply #1 on: January 31, 2018, 09:55:56 »
A key aspect of RRSPs that needs to be understood is that they are a tool for income deferral.

You pay into your RRSP which is a tax reduction, so you're paying less tax now, and paying into an RRSP which will build equity at a tax free status annually, and you will draw out of your RRSP when your income is at a lower level (and hopefully a lower tax rate.)

However. 

We in the CAF have what my investment manager called  "gold plated" pension in that it is Defined Benefits.

It all comes down to your tax bracket.

Here's the Federal rates:

$45,282 or less. 15%
$45,282 to $90,563. 20.5%
$90,563 to $140,388. 26%

Here's the provincial rates for NS (where I live):

first $29,590 8.79% first $29,590
over $29,590 up to $59,180 14.95% 
over $59,180 up to $93,000 16.67%

Let's take a retiring member at the rank of PO2/Sgt Spec 1, 5 years after getting promoted with 25 years service complete.

Monthly salaries for his last 5 years would be:  6458, 6517, 6582, 6647, and 6705 respectively, giving a 5 year best average of:  $6582

50% of that best 5 average is $3291/mo or $39,492/yr.

That means that the tax burden is going to leave the retiree approximately $30,306 (using the "Simple tax calculator at https://simpletax.ca/calculator )

That means that this individual has an extra $6K of income space available before they bump to the next higher bracket.  If your RRSP withdrawal is more than $500 a month, you're going to have to end up paying a lot more in taxes.

Here's a simple table based on annual incomes vs calculated after-tax income with the Average Tax rate included:

39000  29986  23.11
40000  30636  23.41
41000  31287  23.69
42000  31937  23.96
43000  32587  24.22
44000  33238  24.46
45000  33888  24.69
46000  34534  24.93
47000  35129  25.26
48000  35725  25.57
49000  36320  25.88
50000  36915  26.17

With our defined benefit pensions (which will actually see an annual increase based on indexing) how much more money do you need as income, how much do you want to bring in before you jump tax brackets...?

My personal situation.  I'm looking at a Best 5 right now (if I pulled pin today) of just over $7,000 with 25 years complete.  That'd see me with an annual pension of approximately $42,000.  My personal goal is to hold out until that hits above the top bracket ($59K) with a few grand to spare.  My RRSP income will NOT push me out of that income bracket (59-90K considering both the provincial and federal brackets) so I will face the same  average tax rate.

That's how I see things at least.

In terms of investments, because I have a 'gold plated' pension, I've got my investments in some of the high/higher/highest risk categories, and have seen an annualized rate of return in excess of 15% over the past 4 years.  One year I realized a 42% gain.  My financial manager expressed to me that he wished he'd put his money where he put mine that year. 

I'm not looking at needing my RRSP income for a while, but I am looking at a 7 year timeline for retirement from the CAF.  At which point, my best five will settle at $7860/mo, giving me a $62K pension.

In no way am I an expert investor, nor a financial manager of any sort.  However, by the end of that 7 years, it is my goal to be mortgage free, and my kids will have enough money in their RESP's to pay for most if not all of their post secondary schooling.

NS


(Also of note, the concept of it taking money to make money is quite valid.  The investments I'm in right now have an entry gate of $25K.  I took my $28K Payment in Lieu of Severance and invested it when I received it.  That's now worth almost $60K in 3 years.   Not too bad.  Normally you look to double your money up every 7 years.)
Insert disclaimer statement here....

:panzer:

Offline Colin P

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Re: Investing stuff
« Reply #2 on: January 31, 2018, 10:34:25 »
Also where are you in the investment curve age wise? Do you have a large cash payout coming to you in 5 years, then RRSP are good and you need to manage your room to fit that payout, that's where I am as this is my last year of work, so I have been saving RRSP room to accommodate my severance pay.

Offline Rifleman62

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Re: Investing stuff
« Reply #3 on: January 31, 2018, 12:02:23 »
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Offline mariomike

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Re: Investing stuff
« Reply #4 on: January 31, 2018, 13:48:44 »
I know a lot of you have pensions and because I am interested in what you guys read into it.

I'm an ( OMERS ) Ontario Municipal Employees Retirement System pensioner.

Municipal police officers, firefighters and paramedics in Ontario are enrolled in OMERS. http://omers.com/pdf/Supplemental_Plan_handbook.pdf

OMERS is a Defined Benefit ( DB ) pension plan.

The Accrual Rate was 2 per cent when I was on the job. ( 35 years of service X 2% = 70 % unreduced pension with full benefits at age 55. )

It is now 2.33 per cent. ( 30 years of service X 2.33% = 70 % unreduced pension with full benefits at age 50. )

The annual cost of living adjustment ( COLA ) is 1.49% as of January 1, 2018.

You receive the OMERS bridge benefit as part of your total pension benefit. The bridge benefit essentially "tops up" your early retirement pension until age 65. You are eligible for a reduced retirement pension from CPP at age 60.





« Last Edit: February 01, 2018, 21:05:59 by mariomike »

Offline AbdullahD

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Re: Investing stuff
« Reply #5 on: January 31, 2018, 19:50:55 »
Rifleman, navy shooter, good points and nuances I missed. I suspect that with these points the differences between the models will be even closer and essentially make this into a semantics type argument for retirement plans that include defined benefit pensions... sadly defined benefit seems to be becoming a thing of the past, which is a crying shame, I personally consider it a huge perk I know a lot of guys here at CN rely heavily on theirs.

Hey Colin, I am in the wealth accumulation phase ;) I'm only 31 mate a young chap yet lol. But on that point most people's largest financial windfalls are from inheritance, from which I understand get taxed on the estates side not the beneficiaries side. I suspect maxing out the RRSP may not be as desirable as maxing out a TFSA or NRSP as far as wealth creation goes.. due to taxation on withdrawl. But large financial windfalls could be allocated differently ie paying off or buying a house, eliminating debt and investing as a secondary priority. But im not an adviser and this is all theory to me, p.s I believe in in your neck of the woods darn training in Vancouver and surrey lol

Thanks for input guys
Abdullah

Ps this conversation is not because I am a greedy fellow at least I don't think I am, but I just enjoy mental workouts and expanding my understanding of things.

Offline Colin P

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Re: Investing stuff
« Reply #6 on: February 01, 2018, 10:47:03 »
If you are the only recipient of the estate, one option is to have your parents place you on title, however it also complicates life in case of divorce, unforeseen death of you and the family not wanting the portion of the estate reverting to your spouse, etc.

Offline Baden Guy

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Re: Investing stuff
« Reply #7 on: February 01, 2018, 12:34:51 »
Couple of things I discovered as a retiree :
RIF payout is taxable. TFSA contributions taxed during high earning years but payout is not.
I think many people now plan on maximizing their TFSA contribution each year.
My money is in TD index e funds, very low MER and in a 40 20 20 20 split. Running around 6% annual return and is a reasonable safe portfolio.
And yes it is a great thing to have a defined benefit pension plan.  :D

Offline Baden Guy

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Re: Investing stuff
« Reply #8 on: February 05, 2018, 19:30:28 »
Thought I would add a link to the idea behind my previous comment :

http://www.moneysense.ca/save/investing/index-funds/three-ways-build-couch-potato-portfolio/

I chose Option 2: TD e-Series Funds.
And how it performed : http://www.moneysense.ca/save/investing/index-funds/couch-potato-portfolio-performance/
« Last Edit: February 06, 2018, 14:53:02 by Baden Guy »

Online FJAG

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Re: Investing stuff
« Reply #9 on: February 05, 2018, 21:28:21 »
If you are the only recipient of the estate, one option is to have your parents place you on title, however it also complicates life in case of divorce, unforeseen death of you and the family not wanting the portion of the estate reverting to your spouse, etc.

I was going to stay out of this thread but this particular comment made me want to jump in.

When I practiced law, I saw quite a few individuals who went to a trust company estate planning advisor and usually ended up with two suggestions 1) make the trust company the executor/administrator of the estate and 2) add your child(ren) to the home title in order to avoid "estate taxes". They would then be sent to me for independent legal advice prior to executing all the documents.

Inevitably my advice was that they didn't need a trust company as their executor/administrator (and the resulting expense and tie up of the estate) as their estate  was simple enough to simply make their surviving spouse do that job. With respect to adding a child to the title my advice was always that they needed to have an independant accountant look at the situation. Over and above the issues that Colin P raises (and about a dozen even more hair-raising ones) there are many additional tax issues to be considered. Very few provinces, if any, still have "estate taxes". Instead you pay a fee for the administration of the estate based on its value but this is a relatively modest amount that varies by province. Instead there are tax consequences which must be taken into consideration at the time of death and specific advice on the specific situation is needed. In addition adding a child to a title may be considered a taxable "gift" to the child and there could be capital gains issues if it is not a principle residence.

I'm a long way out of being current on this topic and am not giving legal advice here but I would strongly recommend that anyone giving even the slightest consideration to doing any such thing speak to their lawyer and accountant and work out all the pros and cons in detail. My personal opinion is that even if you might save a few bucks on the estate, things change in life and you can't always count on your currently cooperative child (and his or her spouse) of always being that way. Things can go very, very wrong, very, very quickly.

 :cheers:
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Offline AbdullahD

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Re: Investing stuff
« Reply #10 on: February 05, 2018, 21:37:03 »
Thought I would add a link to the idea behind my previous comment :

http://www.moneysense.ca/save/investing/index-funds/three-ways-build-couch-potato-portfolio/

I chose Option 2: TD e-Series Funds.
And how it performed : http://www.moneysense.ca/save/investing/index-funds/couch-potato-portfolio-performance/

I'm not huge on the couch potato per-se I like dividend stocks and value. Also I dislike any funds with management fees lol or well to much of them or the ones that tax the entire portfolio.

Offline Oldgateboatdriver

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Re: Investing stuff
« Reply #11 on: February 05, 2018, 22:06:03 »
I was going to stay out of this thread but this particular comment made me want to jump in.

When I practiced law, I saw quite a few individuals who went to a trust company estate planning advisor and usually ended up with two suggestions 1) make the trust company the executor/administrator of the estate and 2) add your child(ren) to the home title in order to avoid "estate taxes". They would then be sent to me for independent legal advice prior to executing all the documents.

Inevitably my advice was that they didn't need a trust company as their executor/administrator (and the resulting expense and tie up of the estate) as their estate  was simple enough to simply make their surviving spouse do that job. With respect to adding a child to the title my advice was always that they needed to have an independant accountant look at the situation. Over and above the issues that Colin P raises (and about a dozen even more hair-raising ones) there are many additional tax issues to be considered. Very few provinces, if any, still have "estate taxes". Instead you pay a fee for the administration of the estate based on its value but this is a relatively modest amount that varies by province. Instead there are tax consequences which must be taken into consideration at the time of death and specific advice on the specific situation is needed. In addition adding a child to a title may be considered a taxable "gift" to the child and there could be capital gains issues if it is not a principle residence.

I'm a long way out of being current on this topic and am not giving legal advice here but I would strongly recommend that anyone giving even the slightest consideration to doing any such thing speak to their lawyer and accountant and work out all the pros and cons in detail. My personal opinion is that even if you might save a few bucks on the estate, things change in life and you can't always count on your currently cooperative child (and his or her spouse) of always being that way. Things can go very, very wrong, very, very quickly.

 :cheers:

+ 10,000

Talk to your lawyer - not to someone that happens to be in the business of actually "executing" estates.

This is from another retired lawyer on this site: me.


 

Offline Colin P

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Re: Investing stuff
« Reply #12 on: February 06, 2018, 12:12:44 »
Further to FJAG comments, make sure you have a will, Power of Attorney and child care guidance prepared. In BC if a person dies without a will, all decisions regarding that estate go to a board that takes their duties seriously and will take about 6 months to make decisions and to allocate responsibility, all for a hefty fee. The job of financial and legal officials is to consider worst case scenarios, such as both parents are dead, who raises the kids, where do they go? Also what happens if you become a living vegetable? Is the house just in your name or is it shared? People may be reluctant to discuss these issues with their spouse, particularly if things are not going well and you might not want them on title or bring it up.