Why I don’t like RRSPs

phantome — Fri, 20 Nov 2009 17:40:08 +0000

Registered Retirement Savings Plan

The Canadian government’s answer to the falling tax base. Over the last 40 years more and more Canadians have had the ability to put aside money towards “retirement”. In the beginning of this trend people were being very smart about it. They were educating themselves about investing and the power of corporations, and were keeping their money out of the hands of the government tax man. This started putting a dent in tax revenue, so the government had to think up a way to stop this trend. They knew that the people were getting to smart about their financial situation , and any time a population gets to smart for the governments good it’s time to take action. They decided to take advantage of the fact that human beings are basically lazy, and that if given the opportunity most people will take the easiest way out of almost any situation.

Enter the RRSP. Why go to all the trouble of managing your own wealth creation and retirement savings, just let your friendly neighborhood tax man do it for you. After all we all know how the government always has OUR best interests in mind right? All you have to do is open an RRSP account at your favorite bank or investment brokerage house, put X amount of money into it over the coarse of the year, and bingo your done. Your money grows TAX FREE until you reach retirement age, when you convert the RRSP into a RIF ( retirement income fund) and start taking money out to live on for the rest of your life or until the fund runs out of money whichever comes first. Isn’t that easy boys and girls, you don’t have to do anything, you don’t have to learn about investing, you don’t have to research different investments and make decisions for yourself. Just give over your money to the banks and mutual fund managers, and they will do whats best for you. As an added bonus, just for playing ball on this one the government will allow you to use your contributions as a tax deduction, every year that you participate in their little game. Oh by the way, all you Americans reading this. Your 401K accounts work very much the same way as our RRSP accounts so you may want to pay attention too.

Lets take a closer look shall we.

Number 1. TAX FREE. Most people are under the impression that these accounts are tax free, this is just not true. They are TAX DEFERRED. Big difference. What this means is that in return for not paying any taxes while the fund grows, you will pay taxes when you take the money out. So while your mutual fund manager is having fun buying and selling billions of dollars worth of stocks on a daily bases, and raking up millions of dollars a year in brokerage fees ( which he is allowed to take directly out of your fund I might add ). You don’t have to worry about all the capital gains and losses he/she is creating. This is a very good thing for them, because if the mutual fund companies had to pay capital gains taxes on these funds they would very quickly go out of business. So ok we have given them all our extra money, all of our working life. Now it’s time to sit back and enjoy our golden years. Listen very carefully, NO matter how your money is invested at the time your fund becomes a RIF ALL THE MONEY YOU TAKE OUT IS SUBJECT TO INCOME TAX! Don’t believe me? Ask your accountant. How many of you think income tax will be the same or lower when you retire than it is today?

Number 2. Banks and mutual fund companies have OUR best interests at heart. Please, is there anyone out there in the real world who actually believes this? Banks and mutual fund companies have one goal and only ONE goal, and that is to make money for their shareholders, period end of discussion. They don’t give one jot or tittle about your retirement except to the extent that you continue to give them control over your money. How do these people make money? The only source of money these companies have is charging you service fees. Thats right whether you make money or lose money in their funds, they get to charge you fees. Most of these fees you don’t even know about. The biggest of them is brokerage fees. Every time they buy or sell a stock within your fund they get to charge a broker fee, thats why they trade stocks so vigorously, the more they trade the more fees they get to deduct from your fund balance. You never notice this because it come out directly from the fund itself, so they don’t have to list it on your yearly statement. In Canada alone this accounts for billions of dollars. Don’t believe me? Ask your accountant.

Herein lies the reason for the TAX DIFFERED status. By encouraging you to invest in mutual funds within an RRSP or 401K the government has assured itself of a safe and secure source of INCOME TAX for the rest of your life. EG. Lets say you retire with a RIF worth 1 million dollars. You decide to leave the principle in mutual funds at an annual rate of return of 5% ( we will be nice and say the fund averages that for your life time ). This means that the fund itself is generating $50,000.00 a year in income. Is that enough for you and your household? Not mine. I figure the average North American household needs closer to $150,000.00 a year for a decent retirement income, because remember INCOME TAX comes off first. $150,000.00 a year will put you in an approx. 40% tax bracket so this will leave you with roughly $90,000.00 to live on, $60,000.00 going to the tax man. In this example your RIF will decrease in value by $100,000.00 per year or more and you will be out of money in roughly 10-15 years. If you retire at age 65 this means you will be broke sometime between age 75 and 80. If you plan on dieing before then, great if not, what then? This system is designed to have you die penniless, giving as much money to government along the way, over as long a period as possible.

Depressing? Not to worry there is a better way.

Stay tuned

Remember Opportunities Knock have the Courage to Answer.

Tuesday November 10 2009

phantome — Wed, 11 Nov 2009 00:22:50 +0000

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

Warren Buffett

The greatest stock investor of all time Mr. Warren Buffett, is not a stock trader. A stock trader is a person who tries to buy stocks when they are low and sell them when they are high. They make money on the difference, when they are right. It’s kinda like when you go to Las Vegas and put a chip on odd or even at the roulette table. If the ball lands on odd you win, if it lands on even you lose. Trading stocks on the stock market is just another form of gambling. Unless you have a WORKING crystal ball at home, there really is NO way to accurately predict which way a stock price will go. If you are very lucky and can spend all day watching the market for ” trends ” ( assuming you know what a trend is and how to spot it ) you might and I say MIGHT make money at it. Most financial planners and mutual fund managers fall into this category. Which is fine for them as they don’t usually use their own money. They get to use YOURS, and it doesn’t matter to them whether you make money or lose it, because they get to charge you fees for managing your money. Doesn’t that sound like a lot of fun. Fun for them, not for YOU, because most of the money in your Canadian RRSP’s and your American 401K’s is sitting in mutual funds of one kind or another. We are talking about trillions of dollars of your money, your ” retirement money “, your children’s ” college money ” all sitting in mutual funds. Making how much? 2,3, maybe 5% yearly, if your lucky. Do yourself a favor and take a close look at the fee structure of those funds. You will be shocked at how much of your hard earned money goes to them in fees.

There has to be a better way. I think Mr. Buffett learned that better way back in the 1960’s when he started investing in stocks. Instead of trading stocks, he decided to simply find well run companies that he thought would be around for a good long time, and that payed a dividend. He purchased stock in those companies and reinvested the dividends in more of the same kind of companies. Then slowly over the years he became very very wealthy. Mr. Buffett rarely sells stock in a company unless the management team of that company changes, and he doesn’t feel confident in the companies long term viability.

I believe that I will follow Mr. Buffett’s example , instead of the rest of the herd. 40 million in net worth CAN’T be wrong.

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Why I don’t like RRSPs

Tuesday November 10 2009