Is Caesar, A 37 Year Old Renter, Putting Too Much Money Into Retirement Savings And Employee Stock?

Q. I am 37 years old with about $1 million in assets. I earn roughly $170,000 annually and rent a nice two-bedroom apartment. I do not want to own property since I move around a lot to advance my career.

Here is the breakdown of my net worth: $30,000 in a bank account; $175,000 in a self-directed savings account; $400,000 in a registered retirement savings plan (RRSP); $150,000 in a tax-free savings account (TFSA) and $135,000 in an employee share purchase plan.

I don’t plan on retiring soon since I still love my job, but would like to set myself up to be able to retire comfortably in 10 to 15 years. My annual expenses right now are only $46,000 per year, so I have no trouble saving money at the moment. Am I putting too much money into retirement savings and employee stock? Is the lopsidedness of my savings into a hefty RRSP going to make it more difficult to retire early in 10 years if I chose to do so? —Thanks for your help, Caesar

FP Answers: Hi Caesar. A hefty RRSP won’t make it more difficult to retire early and I will touch on that a little further down. You appear to be doing well setting yourself up for a financially successful retirement at an early age. You are contributing to your RRSP, TFSA, and non-registered accounts, which will give you flexibility later in life. Having multiple income sources, taxed differently, helps to minimize tax and preserve benefits and credits.

You will likely spend from the RRSP when you convert it to a registered retirement income fund (RRIF) at retirement. It will provide you with a steady stream of taxable income. Your non-registered accounts are not tax sheltered like the RRSP and TFSA, and will probably have some sort of taxable distributions, interest, dividends, or capital gains. Plus, when you sell an investment for spending money, or to make an investment change, you will have a taxable gain. It is for this reason non-registered money is used for larger lump sum expenses or to increase your spending income. Often money that is not tax sheltered is spent first.

You will want to keep an eye on your marginal tax rate and the different levels of income that affect government benefits and credits. For example, if you draw all your income from your RRIF and it pushes you into a higher tax bracket and you lose some of your Old Age Security (OAS), that’s not good. That situation may be avoided by drawing a blend from your non-registered and RRIF accounts.

If you have a really big expense, on top of your regular RRIF withdrawals, your TFSA may be the best place to draw from. The money comes out tax free so it will not increase the amount of tax you pay, nor will it impact government benefits or credits. It would be nice if all your retirement income could be tax free, but it can’t.

As you are making your current investment choices, the first decision should be which account to invest in. In your case with an annual income of $170,000 the RRSP is likely your best bet. You can add 18 per cent of your income, or $30,600, to an RRSP and, depending on the province or territory you live in, you will get a tax refund of $10,710 to $13,760. After you do your taxes and receive the refund, use that money to top up your TFSA and the stock option plan or non-registered account.

You don’t have to be concerned about your RRSP being too large, especially if you retire in 10 years. If your RRSP/RRIF earns three per cent above inflation you will be able to draw out about $44,000 a year, indexed to about age 87. With a four per cent above-inflation return, the amount you can draw from your RRIF increases to about $55,000 a year. At these levels you don’t have to be concerned about OAS clawback. Even if you work another 15 years and your RRIF earns four per cent above inflation you can draw $85,000 a year in today’s dollars, which will keep you well below the start of the OAS clawback threshold.

Ceaser, you don’t have a lopsided RRSP issue but what about you? Do you think you are living a balanced life or are you putting too many things off today, hoping to do them in the future? You are only going to be age 37 once and the things a 37-year-old wants to do, and can do, won’t have the same meaning at age 65.

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Time is precious and moves fast. If you haven’t already, give some thought to your strategy around investing in life experiences. It is important that you find the right balance between living today and saving for tomorrow.

Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. He can be reached at alnorman@atlantisfinancial.ca.

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