Rockin’ Your RRSP
Bruce Sellery’s book The Moolala Guide to Rockin’ Your RRSP takes a fresh approach to motivating people to save money. Saving and investing can be scary and boring, and requires self-sacrifice. Sellery’s five easy steps are aimed at helping those who feel overwhelmed by the process.
This book contains many of the technical facts people should know about RRSPs, but these get slipped in while Sellery is telling some entertaining stories that explain his five-step process. The first step is the most important: find a reason for saving that has meaning for you. Sellery’s answer is adventure, but everyone has their own reason they find motivating. In the remaining steps, Sellery remains keenly aware of the emotional reasons why people don’t follow through on their savings plans.
My biggest criticism of this book is that it tends to steer people to their banks to open RRSPs. Saving money in bank mutual funds with sky-high MERs is better than not saving at all, but there are better options. The book mentions some other choices, but I would like to have seen more discussion of the importance of keeping fees low.
In the nitpick category, when 30 years of 2% inflation increases prices by 81%, this is not the same as “your purchasing power would decline by 2% every year, or 81% over thirty years.” In fact, purchasing power declines only 45%. This type of basic error undermines confidence in other numerical parts of the book.
Sellery’s “Rule of $20” implicitly advocates a 5% starting withdrawal rate from savings when you retire. With the length of today’s retirements, even a 4% withdrawal rate is somewhat aggressive for portfolios with ultra-low fees. For people invested in expensive mutual funds, a 3% withdrawal rate is more realistic.
In an inspired effort to get past procrastination, Sellery says that whether your reason for not getting started saving in an RRSP is fear of looking foolish, boredom with thinking about money, lack of discipline, or lack of time, it’s not likely to change so there’s no point in waiting for it to change. You might as well get started.
Overall, this book is well-suited to people who feel overwhelmed by the process of learning how to save money in RRSPs. Those who are already on their way may still benefit from the ideas on how to create good habits and stay engaged.
This book contains many of the technical facts people should know about RRSPs, but these get slipped in while Sellery is telling some entertaining stories that explain his five-step process. The first step is the most important: find a reason for saving that has meaning for you. Sellery’s answer is adventure, but everyone has their own reason they find motivating. In the remaining steps, Sellery remains keenly aware of the emotional reasons why people don’t follow through on their savings plans.
My biggest criticism of this book is that it tends to steer people to their banks to open RRSPs. Saving money in bank mutual funds with sky-high MERs is better than not saving at all, but there are better options. The book mentions some other choices, but I would like to have seen more discussion of the importance of keeping fees low.
In the nitpick category, when 30 years of 2% inflation increases prices by 81%, this is not the same as “your purchasing power would decline by 2% every year, or 81% over thirty years.” In fact, purchasing power declines only 45%. This type of basic error undermines confidence in other numerical parts of the book.
Sellery’s “Rule of $20” implicitly advocates a 5% starting withdrawal rate from savings when you retire. With the length of today’s retirements, even a 4% withdrawal rate is somewhat aggressive for portfolios with ultra-low fees. For people invested in expensive mutual funds, a 3% withdrawal rate is more realistic.
In an inspired effort to get past procrastination, Sellery says that whether your reason for not getting started saving in an RRSP is fear of looking foolish, boredom with thinking about money, lack of discipline, or lack of time, it’s not likely to change so there’s no point in waiting for it to change. You might as well get started.
Overall, this book is well-suited to people who feel overwhelmed by the process of learning how to save money in RRSPs. Those who are already on their way may still benefit from the ideas on how to create good habits and stay engaged.
If the proposed withdrawal rate is 5% of current portfolio every year (e.g. lower withdrawal amount after a bad market year, higher after a good one), then it looks like a reasonable rate to me.
ReplyDelete@Anonymous: Readjusting spending to 5% of assets every year certainly eliminates the risk of running out of money if you really can adjust spending down when necessary. However, for portfolios with high fees or low exposure to stocks, this is likely to turn into a plan that involves spending a lot initially and having much less later in retirement.
DeleteI'd also like to hear more about low fees as well because they seem to be fairly pricey for those who depend on others to do the investing for them. Thanks for the review.
ReplyDelete@CBB: In a tweet Bruce Sellery said that his first book (Moolala: Why Smart People do Dumb Things with Their Money) has a strong focus on fees.
DeleteAHH! If only we could withdraw only 5%.
ReplyDeletePossible if all your monies are in non-registered savings or TFSA but if you are tied in to an RRSP and convert to a RRIF the government's have dictated how much you will (like it or not) have to withdraw.
So al this conjecture on the percentage to withdraw is simply that , conjecture. It all depends on how and where you put aside your retirement funds
@Anonymous: I hear this a lot, but it isn't true. Just because you are forced to withdraw money from a RRIF doesn't mean you have to spend it all. You can save some in a TFSA or non-registered investment to augment your diminishing RRIF withdrawals in later years.
DeleteWhile some years you will have to withdraw more than 5% from your RRIF and possibly pay painful income taxes on the withdrawals, you don't have to spend it. It is important, though, to plan for retirement on an after-tax basis so one realizes just how small one's RRSP/RRIF really is.
Delete@Bet Crooks: Excellent point. Your RRSP/RRIF is only partly your money. Some of it belongs to CRA.
DeleteAgreed!
DeleteYou do not have to spend it all. Excess amounts can be re-invested in your TFSA ($5,500 at present) or in non-registered funds.
Never the less, the government(s) are going to get their taxes back and if you live to be 90, the mandatory rate is a 20% withdrawal. Doubtful you will have anything left in sheltered accounts by that time , except the TFSA.
So you better plan some kind of scenario to re-invest any extra money you are "forced" to withdraw from your RRIF keeping in mind that non-registered income will be taxed as well. Hopefully at a lower rate if you are pulling dividends. Once your RRIF (or annuity, if it is term) is exhausted then you can just use what you need.
However, after seeing Noah the film and reading up about him I have had to revise my life expectancy. He was siring his family at the ripe old age of 500. Now if I can live to half of that....LOL
@Anonymous: Yes, if you choose to spend some safe percentage of assets it will be less than the RRIF withdrawal in the early years. In later years, the RRIF balance will become very low and additional spending will come from the TFSA and/or non-registered savings. You're right that CRA will get their money.
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