Q – I am a follower of your newsletter and have read your TFSA books with great interest. My wife and I are both nearly 50 years old and have approximately $200,000 to invest. I currently have $180,000 in an RRSP, and she has about $230,000 in her RRSP. We both have remaining RRSP contribution room, hers being about $40,000 and mine less than $10,000. We also have an emergency fund of $50,000, which is in a high interest account should one of life’s surprises present itself.
I have spoken to a number of financial advisers regarding potential investment options with minimal risk. Some tell me to set up TFSAs for both of us and also to use up all of the remaining RRSP room while investing the balance in stocks. Others tell me the RRSP contributions I already make are too high that I should buy their mutual fund products. Any guidance? – Joe K.
A – To begin with, you and your wife have obviously been diligent savers. Bank of Canada Governor Mark Carney would approve! Now to your question.
Although you have provided a lot of information, you have left out some important elements. For example, do you and/or your wife have employer pension plans, and if so, how much do you expect to receive from them? That is critical to your decision. It may seem like you have a lot of money in RRSPs, but if they represent the source of most of your future retirement income it may not be enough.
Your two plans are currently worth $410,000. If you stopped contributing now and the money earns 5% a year, the RRSPs would be worth about $850,000 in 15 years, when presumably you’d be coming up to retirement. If inflation averages 2% over that time, the value of your RRSPs in current dollars would be about $640,000. Assuming a 5% annual withdrawal rate (until you reach age 71 after which it would be higher), that would generate before-tax income of about $32,000 in 2010 dollars. If that plus CPP/OAS would be enough for you to live comfortably in retirement and you have no pension, then your RRSPs are probably adequate. Your next logical step would be to set up Tax-Free Savings Accounts for both of you and maximize your contributions.
However, if after doing these calculations you feel you want to build a larger retirement fund, then continue to make RRSP contributions and invest the money conservatively. This way, you’ll generate a tax refund (assuming you are both working), which can be used for starting your TFSAs. – G.P.
Gordon Pape is one of Canada’s best-known personal finance commentators and mutual fund experts and a regular contributor to the Fund Library. Click here to submit your question to Gordon.
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The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.