Good morning friends!
It’s Friday here in Southern Manitoba and it’s been quite the week of COVID. Back in May and June, lots of folks exclaimed how Manitoba may have been the safest place on earth — we went 14 full days without a case and it looked like we were going to avoid the virus entirely.
Those feelings likely deserve a little giggle — we now have more cases per capita than many places in the United States. And it’s not slowing down.
Hopefully we’re able to pull it back somehow in the next few weeks.
It seems, no matter where you are, this virus knows no bounds.
This week, we talk about the core difference between a pension and an RRSP, and there’s a quick blurb on what to do with your RRSP if you have a pension plan through your employer.
Quick Thought of the Week
This tweet from @ContrarianSaver this week has bounced all over my brain:
I think it’s reasonable to assume your comp will rise at least 10x from start to finish in your career (say about 30 years IMO).
This also enables you to increase both savings and spending (if desired) as you grow professionally.
What is your multiplier?
This is undoubtedly true, and is one of the least appreciated assets every single person has: their skill-set.
In the same way real estate appreciates each year, or how your stock market portfolio grows, your skill-set appreciates each year as well. A combination of education and experience can increase that rate of return, likely skewing more towards education early in your career and more towards experience near the end of your career.
Don’t underestimate your long-term earning potential when building out your portfolios.
This week, I want to spread the love a little. I’ve followed a fair number of these blogs for quite some time and they offer great advice. In my estimation, they skew more towards the investment side of things rather than structure. But that shouldn’t be a point of hesitation.
The Main Difference Between a Pension and an RRSP
There are many differences between a pension plan (often sponsored or matched by an employer) and an RRSP (Registered Retirement Savings Plan), but they are both amounts that are set aside on a tax-deferred basis and intended to be drawn in retirement.
The key difference between the two is control.
Amounts held in an RRSP can be withdrawn at any time (albeit with taxes held by the financial institution) and can be used at any time. You’ll pay tax on the amount in the year in which you withdraw the RRSP amounts. But you can withdraw the amounts at any time you wish.
Should you die before retirement, the entire amount of the RRSP is yours — you’ll either transfer the amount to your spouse upon death or you’ll take the entire amount as income and pay tax on the entire amount.
Amounts held in a pension plan are usually withdrawn only under specific rules and at set times, and then amounts are withdrawn at relatively equal pace throughout retirement.
Should you die before retirement, pension plans generally pay out a death benefit to your estate, which is generally not the entire amount of pension assets held in your name.
The key is control: With an RRSP, you control when the amounts can be withdrawn. With a pension plan, you have very little control when the amounts can be withdrawn.
Pensions have loads of rules and are managed by an external source. RRSPs have far simpler rules and can be managed by yourself directly.
Of course, pension plans are generally still worthwhile — usually employers match pension contributions up to a certain amount, effectively doubling (or more) your savings rate. Quite often, employers will not do the same for an RRSP contribution plan.
Lastly, pension plans and RRSPs are not mutually exclusive (one or the other), nor is it automatically wise to have both. An issue I see occur far more often than I’d like is for retired folks (or those staring at a health crisis far earlier in their lives than they originally hoped for) to have too much tax-deferred income. If you have maximized your pension plan and maximized your RRSP contribution limit throughout your life, you may end up paying more tax in your retirement years (or upon death) than you would have had you not contributed to your RRSP throughout your life.
If you have a pension plan through your employer, I recommend keeping your RRSP for other investment opportunities, such as a place to shelter recapture of depreciation on a rental property, or as a place to shelter a future capital gain on a cottage.
If you don’t have a pension plan, then I recommend creating your own pension plan in your RRSP.
And if you have a choice between a pension plan and an employer-matched RRSP contribution plan, I’d choose the RRSP plan 99% of the time.
In the end, you can control so much more if your retirement savings are in an RRSP.
Thanks again for coming down. I hope you and yours have a wonderful weekend ahead and a healthy week of work afterwards!
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