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Wednesday, April 16, 2014

Maxed Out

Posted by Tim Stobbs on April 9, 2014

While I was having coffee the other day with some co-workers it came out that I was maxed out…no, not on credit cards, but rather RRSP contribution room and last year my wife and I maxed out of TFSA contribution room.

Until that moment I had forgotten how unusual that state of being is for most people.  The older people around the table all had unused RRSP contribution room of $30,000 to $50,000 and all of them make an healthy salary.  So it wasn’t the fact they couldn’t save, but rather they had chosen not to.

In total Canadian’s have $600 billion in unused RRSP contribution room, which is a lot of tax savings people are leaving on the table. Put it another way, if everyone used that up in a single year at a mere 26% tax rate the government would be out $156 billion in revenue.  That doesn’t even touch the used TFSA contribution room out there as well.

So why is saving such a difficult thing to do?  After all the amounts aren’t huge in the case of RRSPs it is 18% of your previous year income (less pension adjustments).  So if you had a defined contribution pension you could likely get 5 to 10% there, which leaves anywhere from 13 to 8% left to be saved.  Yet you get a tax refund on that money, so as long as you keep putting your refund back into RRSPs you really only have to save around 10% or less.  Can you not live on 90% of your income?

Granted if you don’t have a pension plan this takes a bit more planning to really pull off.  18% of your income can seem a big difficult, but that is why you need to get the tax refund at once rather than waiting until tax season.  How? You can use that handy tax form T1213 Request to Reduce Tax Deductions at Source.  By having a regular contribution plan setup, you can fill this out and send it in then a few weeks later you can start getting your refund on each paycheck rather than waiting the full year.  This helps keep your cash flow up while saving.  The downside of this trick is you do have to file it every year (in most cases).

I should also point out I also had extra RRSP contribution room for a number of years (~$30k).  It was only between some planning and adding extra money for years that we managed to catch up.  Yet it can be done and when you put your mind to it.

So have you ever maxed out some contribution room?  If so, how did you do it?  If not, what is preventing you?

Constant Vigilence

Posted by Dave on April 8, 2014

I like the phrase “Constant Vigilance”. I think I picked it up reading Harry Potter – one of the teachers named Alastor “Mad-Eye” Moody says it all the time, and is essentially paranoid of everything that happens in the world. Well I’m not paranoid, I have to constantly look out for someone who is out to get me and foil most of my long-term plans when it comes to things about my personal finance plan, my health, or other goals…Me.

I was reading an article titled “The 12 cognitive biases that prevent you from being rational” which clarified the necessity of Constant Vigilance to me, specifically, the section around “Current Moment Bias”. Current Moment Bias is my nemesis. This way of thinking puts the onus of all problems onto the shoulders of “Future Dave”, to the benefit of current Dave. Current Moment Bias is the level of thinking that talks me into eating Ben and Jerry’s ice cream (Chocolate Chip Cookie Dough), because “Future Dave” will be able to easily lose the added weight associated with the 560 calorie snack (yes, I looked it up after the fact).

Rationally, I know that I would prefer to not have eaten the ice cream a couple of days later when I step on the scale. The ice cream (or whatever other unhealthy food I ram into my face) is something that makes me feel like crap, and takes me further away from achieving the level of fitness I would prefer to have, and closer to not having the ability to leave the couch.

When it comes to my plan to retire early, Current Moment Bias could really inhibit my ability to meet the goals I’ve set out. I generally limit my impulse buys to minor things such as books or meals out – say 10 or 15 dollars a purchase, maybe once a week or so. These kind of things aren’t really going to matter too much in the long run. Spending erratically too often though, could add months or years to length of time I would have to work, which in the long-run isn’t what I want at all.

So, I attempt to stay “Constantly Vigilant”, while still having some fun. I don’t fret over the minor dalliances I have with bad food, or bad spending. I just try to have my current self pull its own weight in my long-term plans – it removes a level of unnecessary stress from my life. I don’t like checking my bank balance and being $100 poorer than I thought I was with no real enjoyment to show for it, the same way I don’t like to have to work to lose 5 pounds gained eating three times as much ice-cream or pizza or Chinese food as I actually needed to have.

I’m all for solving my own problems when it comes to money or health, but I would rather they didn’t arise because of decisions that my rational self wouldn’t have made.

March 2014 – Investment Update

Posted by Tim Stobbs on April 2, 2014

The following is an update of Tim’s plan to retire early.  Please note we are mortgage free, so net worth is no longer tracked as the house equity isn’t part of the retirement plan.

To track my progress I’ve decided to track both my expenses and my investment gains.  So once the investments gains are consistently beating my expenses I’m financially independent and can stop working.  I use a trailing 12 month average on spending (but excluding vacations) and a trailing 12 month average on investment results.

Investments

Account (Contribution), [+/- Gain or Loss less contributions]

RRSP $37,800 ($100), [+$0]
LIRA $13,820 ($0), [+$50]
TFSA $37,820 ($0), [+$1210]
Pension $93,880 ($1136), [-$46]
Wife’s RRSP $55,420($0), [+$0]
Wife’s TFSA $36,090 ($3000), [+$290]
High Interest Savings Account $3200 (+$600),[+$10]

Investment Net Worth $278,030 ($4836), [+$1514 or +0.5%]

(YTD Contribution: $13,430), [YTD Gain: $8130 or +2.97%]

Average Monthly Gain (12 month rolling) $2201

Spending

Last Month $1634

Another good month overall on spending.  Nothing that odd except we ended up grocery shopping twice (once at the start of March and another time at the end of March for April).

Trailing Last 12 Month Average $2527

Results

Number of months trailing average spending covered by trailing investment gains: 0.87 {Target 1.0 or higher}

PF Score: 22.0  {Target 32}

Commentary:

March was a not bad month at all.  On the plus side we did well to control our spending which helped the overall results which was good because the investments didn’t do that well.  My major issue is I didn’t move those RRSP accounts over yet so they are just in cash and doing nothing.  So after filing taxes this week that is my next task.

Any questions?