Talbot Stevens’

MAX YOUR RRSP STRATEGY

BLUEPRINT


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Talbot Stevens’

MAX YOUR RRSP STRATEGY

BLUEPRINT


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TIP

You’re busy. We’re all busy, trying to put too many activities in too short a day.

To benefit the most from this blueprint in the least amount of time, I suggest that you ...

  • Skim the entire blueprint briefly first. The key concepts are highlighted, allowing you to quickly identify the ideas that are new to you. 
  • Skip the content behind the
    These notes are for those like the details.
    and especially the
    These notes are for those like need to know every detail.
    links, unless you're one of those weirdos like me, who likes math and needs to understand the A-Z of what happens under the hood.
  • Take notes on the concepts that can benefit you.
  • Follow the Next Steps at the end of the blueprint.

The 5 Most Valuable Words in Financial Planning, with 26 px font, and 30 px Line Height

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These notes are for those like the details.
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Can't we get nice curly quotes, like this " "  ??

Sad fact: We're not taught about money. Not even the basics.

First, we need to recognize that if you're going save instead of spend your hard-earned money, there are only three fundamental savings approaches.

  • ad hoc
  • automatic
  • forced

EXAMPLE

Mary is in a 33% tax bracket, and has a $1,000 after tax to invest. Using the RRSP Gross Up calculator, we see that Mary’s $1,000 can be Grossed Up to a $1,500 RRSP contribution.

As valuable as the three words "Pay Yourself First" are, I think we can all agree that it's time they were upgraded to the most valuable five words in financial planning: Pay Yourself First and inflate. Using our shorthand notation and recommended savings levels, PYF 10% should become PYF 10% and inflate 2%.

EXAMPLE

Mary was 35 years from retirement when she started saving. If she averaged 5% returns, her PYF 10% plan of investing $5,000 annually would have grown to about $460,000. By simply maintaining her savings commitment with a "PYF 10% and inflate 2%" plan, her retirement fund would be about $900,000 - an extra $440,000 or 95% more.

As shown in the chart, this simple change of inflating 4% instead of 2%, would increase her retirement fund to about $ZZZ.

Worse, the standard approach of not inflating savings erroneously exaggerates the initial savings amount required.

Automatically inflating your monthly savings is the easier, more natural way to save for retirement.

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If you don’t, you end up saving less than intended. Simply inflating to maintain your initial savings rate is an simple way to boost your retirement savings — without sacrificing your standard of living.

When the loan is paid off, Ted can repeat the Catch Up strategy if he prefers the behavioural benefits of forced savings. In comparing his current savings plan to his MAX plan, we’ll assume that after the Catch Up loan is paid off, he simply Grosses Up and inflates all of his cash flow.

So Ted’s “MAX your RRSP Strategy” Blueprint is to initially use half of his cash flow for forced savings with a $30,000 Catch Up loan. The remaining $3,000 a year is Grossed Up to annual RRSP contributions of $4,500, fueling an automatic PYF investment plan that is inflated by 5% each year. When his loan is paid off, all of Ted’s cash flow is Grossed Up with automatic savings and inflated.

If Ted reinvests the $500 refund for a total contribution of $1,500, this is much better. But it is only partially cooked pasta. He’s added some water to make his contribution 50% bigger, but he can do even
better.

Note that all of the numbers used in this blueprint are rounded off to simplify understanding. It is much more important to confidently understand concepts than to be distracted by figures that are accurate to the penny.

RRSP Refund Strategy 3: Gross Up

NOTE

All of the numbers used in this blueprint are rounded off to simplify understanding. It is much more important to confidently understand concepts than to be distracted by figures that are accurate to the penny.

In a 50% tax bracket, $1,000 of after-tax money equates to, not $1,000, not $1,500, but $2,000 in an RRSP. And if this line was longer, might need more margin.

He would lose half to taxes. So he’d have $750, right? Ted started with $1,000 after tax to invest, and by reinvesting his refund, he’s contributed $750 after tax.

He would lose half to taxes. So he’d have $750, right? Ted started with $1,000 after tax to invest, and by reinvesting his refund, he’s contributed $750 after tax.

Ellen Roseman

Toronto Star personal finance and consumer columnist, author and adult education instructor

Testimonial 3: I spent my RRSP refunds until Talbot Stevens showed me the math on reinvesting them. Now he’s written a book that uses the catchy concept of dry pasta to help you understand a better way to a comfortable retirement.

Ellen Roseman

Toronto Star personal finance and consumer columnist, author and adult education instructor

Testimonail 2: I spent my RRSP refunds until Talbot Stevens showed me the math on reinvesting them. Now he’s written a book that uses the catchy concept of dry pasta to help you understand a better way to a comfortable retirement.

Testimonial: “I spent my RRSP refunds until Talbot Stevens showed me the math on reinvesting them. Now he’s written a book that uses the catchy concept of dry pasta to help you understand a better way to a comfortable retirement.”

- Ellen Roseman, Toronto Star personal finance and consumer columnist, author and adult education instructor

If Ted’s RRSP returns match the 7% interest cost on his Catch Up loan, the Catch Up strategy produces 50% more than his current approach of spending his refunds.

When returns match the cost of borrowing, the Catch Up strategy essentially produces the same results as the Gross Up approach.

When returns match the cost of borrowing, the Catch Up strategy essentially produces the same results as the Gross Up approach.

When returns match the cost of borrowing, the Catch Up strategy essentially produces the same results as the Gross Up approach.

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