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Best RSP rate versus cost saving and simplicity
March 1, 2014
2:27 pm
GS1
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I have been reading about the search for the best RSP rate.

Let us say you are 35 years old and are about to be ready to start contributing to an RSP account next year as you missed Monday's deadline.

So next year (2015) at the age of 36 you invest $15000 at the best rate you can find, say, 3%. Each subsequent year you again invest $15000 in the best rate you can find and continue with that process till 2044 when you retire.

You now have 30 pots of $15000 plus whatever you earned over the 30-n years per institution (assume and average of 3% interest and that works out to a little under $650,000)..

The year 2050 rolls around and you have now turned 71 and have to turn all those RSPs into RIFs, and each month from then till you die you will get 30 deposits from those RIFs. Or, in 2044 you decide to consolidate those RSPs into one RIF account at your favourite institution. Each of the other 29 institutions charges you a transfer out fee -- currently $50 at many institutions and likely to be considerably higher by 2050.

So, my questions are:

Will you have enough for retirement if you make 3% per year on your money.

AND

Do you really want your RSP/RIF funds spread across 30 different institutions?

GS

March 1, 2014
4:24 pm
msl25
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Q1: will you have enough if you make 3% ? it would seem too easy if this can be answered directly without a "it depends" clause because it really depends what do you want your lifestyle to be at age 71? or will you be a healthy 71 year old? and if you go on lots of vacations then i doubt if it will be enough. but HONESTLY if i did stick to your plan and have that kind of saving at year 2050 i feel damn good. (dude, saving $15K every year? that is madness. you have a lot of money. go get laid instead. i can do maybe $4K maximum every year but that's like too much) but if thats the case then $15K/year = i have saved enough. add that to the cpp + oas + gis from the govt. im ready (i think).

Q2: why would you want to spread across 30 different institutions? 3 or 4 financial institution is enough in my opinion.

March 1, 2014
4:30 pm
Loonie
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Hi GS,
I hope this isn't entirely hypothetical, as I think you told us somewhere along the line that you are over 35!
I'm not sure that your imaginary client, let's call him Sam, could find 30 different institutions offering the best-rate-at-the-time, all of which would accept his business as a resident of, let's say, Iqaluit (all right, Montreal, then). Most of the many MB CUs do not make it easy for non-residents, from what I can tell. It's only a notable few that want our business.
If Sam finds himself with the 30 pots in 30 places, then I think he should approach the potholder that seems to most want his business and tell them that they can have 5 or 10 of his pots if they will pay the exit fees from the other institutions. Many will do this, but they have limits. Sam should do this several times with eager potholders so that he can reduce the 30 to, let's say, 5.
Depending on what he is invested in, and where he has invested it, he might still need to keep his money in a number of pots in order to get the appropriate insurance protection.
If, after the first round of consolidation, Sam has 5 potholders, then he can go to a 6th one and make the same proposal: I'll give you all 5 pots if you'll pay the exit fees from those potholders.

Now, he's down to 1 pot, easy to manage in his old age, he's gotten the best-rates-at-the-time, and he hasn't paid any exit fees. If he then wants to choose a different institution that he really wants to do business with, I expect they would happily pay the remaining exit fee to get his $850,000.

Now, as to the first question, whether he can live on the $850,000 starting in 2050, I think he could manage modestly. Inflation eats up about 30% per decade, in round numbers, which I think will reduce the purchasing power of Sam's pot to about $250,000 in today's money. (I could be wrong about that; these calculations always scare me.) At an 8% mandatory withdrawal rate, which he will quickly hit and exceed, he will take out at least $20,000. If he gets CPP and OAS, assuming they still exist in current form, and knowing that Sam has been fully employed all those years, he could be getting the equivalent of about $17,000 from CPP/OAS. So that brings him up to about $37,000. This is not luxurious living, but perhaps he has a spouse who has done the same, thus doubling the family income. Perhaps he inherits some money or wins a lottery or goes hog-wild somewhere along the way and invests in the stock market and hits it lucky. Perhaps he even has a decent pension plan at work. Or perhaps he buys a house which appreciates in value and he decides to downsize or take a reverse mortgage to get more money in his hands. With all the concern about the expected decline in the size of the labour market, Sam could possibly get himself a part-time job in retirement as well, to supplement his income. Or he could move to Elliot Lake or some such place where rent is cheap.
It then depends on how long Sam lives as to whether he has enough. There are some charts somewhere that will tell him when the money will run out. If he plans on living to 105, or maybe even 95, then he can turn the RIF into an annuity somewhere around age 75-80, maybe even earlier if interest rates are good. I haven't seen any rates posted for higher than 80 years as purchasing date, although they probably exist somewhere, but he will need to be careful that he doesn't delay this conversion too long so that he either misses out entirely or misses out on better interest rates.
If he's careful, he might be able to keep himself in the lowest tax bracket, which will help him a lot in keeping his purchasing power, and will also, at least by today's rules, avoid clawbacks, age credit reductions and so on as discussed in another thread.

As I suggested, I may have missed something or miscalculated, but it all sounds plausible to me, if not luxurious. I think the biggest problem is that Sam can't possibly know what the economic conditions or the CRA rules are going to be by 2050, let alone 2070 when he's hitting 90yrs. By then there may be no more fish in the oceans, sea levels may have risen to wipe out much of Vancouver Island where he wants to retire to, we could be experiencing life-altering climate changes, runaway health costs, and all sorts of things that will result in costs that many people like Sam will not be able to afford. And what will our government of the day do then, I wonder.

March 2, 2014
11:48 am
GS1
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Loonie:

I am 67.

The two points I was trying to make with my original post were:

Can one afford to chase best rates each year if that means you will end up with too many pots of money? The RSP and TFSA ads are all promoting their rates as being "best" (and many are) but as we have seen they drop them as soon as you get your money locked in and "locked in" is the operative phrase as many people will allow inertia to take affect and not move the money till they are forced to.

AND

Will GIC rates suffice for the long term? (Another thought I will share is that trying to forecast out more than five years is futile.)

GS

March 2, 2014
8:37 pm
Loonie
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I think I wasted my effort trying to answer the original questions. Perhaps they were rhetorical.

I wouldn't consider that the best rates are the deals of the moment. Only longer-term GICs have any hope of paying enough, and I would anticipate that Sam could make enough time to monitor his investments. 30 investments divided by 5yr terms = 6 reinvestments per year. Surely, every couple of months, he can take the time for that.

If you are asking (again) whether GiC rates will suffice for retirement planning, but also say it's impossible to forecast beyond 5 years, you may be right, but the second negates the possibility of answering the former. Similarly, the question as to how other investments will fare over the longer term (or shorter for that matter) is fundamentally unanswerable. We all make certain sets of assumptions in order to take a stab at answering it, and some choose not to bother.

March 4, 2014
1:13 pm
hdubya
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It depends.

I agree that 5-10 Basis Points can amount to a lot of money if the portfolio is really big (or if it is invested over a long period of time), but if it's moderate sized and year after year, you and your loved ones might enjoy the simplicity of having the money in one place (provided ample deposit insurance is in place). There are many reasons not to be chasing down 30 different institutions for the best rate.

It really depends on your personal circumstances; hopefully you can find a balance in between, without putting too much risk and worry into it.

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