Tag: Retirement

All Hail the Octopus!

This week, I had the pleasure of reading a fantastic article about saving for financial independence and early retirement that was written by Mr. Tako of www.mrtakoescapes.com***. In this magnificent article, Mr. Tako discusses his surprise that anyone would view his choices as “hardcore” on his pursuit to financial freedom. By following his own plan, Mr. Tako was able to retire on his own terms. What some may view as hardcore, others may view as tweaks. It’s all in the eye of the beholder!

While I loved his article, my take-away was slightly different. I was simply happy to know that every small step makes a difference. Sometimes, it feels like saving and investing is a treadmill that’s going nowhere. The destination is so far away, and why can’t I just win the lottery and be done with it already?!?!?! However, articles like Mr. Tako’s remind me that there is an endpoint and that every little step I take gets me closer and closer to it.

Unlike Mr. Tako, I haven’t had many bad jobs nor many bad bosses. For the most part, my career has a many great attributes. I work with very smart people. My work is mentally challenging. I have autonomy over how my tasks get accomplished. I have a nice office filled with natural light. My office plant is big and beautiful, healthy and happy. I’m even happy with my salary since, without debt, my paycheque is more than sufficient to meet my needs.

Still…

At the end of the day, I want to retire and the sooner, the better. When I’m not at work, I’m much, much happier. It’s as simple as that. I have a great circle of friends – I love my family – I’m a bit of a homebody when I’m not travelling. Working gets in the way of that, despite all of the really great facets of my job. When I work, I’m on someone else’s schedule. I’m doing things that mean little or nothing to me. I’m attending meetings that have little palpable purpose. Despite all of the good things that I listed earlier, working means that I have to sell my time to someone else in order to survive financially. If I can find a way to retire early, then I get my time back.

Much like Mr. Tako, I’ve taken steps over the years to find ways to save on daily costs so that I can retire sooner.

At this point, I’d like to fully acknowledge that there is no one plan that will work for every single person. Each of us has to figure out what we’re willing to do in order to achieve the financial freedom that we want for ourselves.

The first big step in the right direction was my decision to take transit. I gave up the daily drive to work way back in 2001. I’m not a huge environmentalist, nor am I troubled by rush-hour traffic. The commute is the same whether I’m behind the wheel or a passenger on the bus. No – my main reason for choosing transit was so I could save on my commuting costs in order to invest money for early retirement. I’m fortunate to live in a location that has excellent transit service for commuters. For nearly two decades, I’ve driven to the park-n-ride, shown my bus-driver my pass, and have happily ridden in safety back and forth to work.

This one small decision 18 years ago has saved me thousands of dollars because I don’t pay hundreds of dollars each month for parking. I fill my tank every 10-12 days. My insurance premiums are lower, and the wear-and-tear on my car is less that it would’ve been with a daily round-trip drive to work.

The second step in my march to financial freedom arose due to a health concern. A sensitivity to caffeine required me to cut down on coffee during my work breaks. Many years back, I went to my doctor and complained of a racing heart. She asked how much coffee I drank. I told her that I had coffee with breakfast, at my mid-morning break, and during my afternoon break. She told me to cut back to one coffee a day and see how I felt. My doctor’s a miracle worker! Within a week, my heart had stopped racing. The upshot was that I was also saving money to be re-directed to my retirement.

Step #3… In 2016, I took the big plunge and cancelled my cable subscription. Again, this wasn’t a strictly financial decision. It wasn’t a money decision at all! I simply got tired of paying for garbage, so I decided to stop. But whatever would I do with the additional money each month that wasn’t going to the cable company? You guessed it – I funnelled the extra money into my investments!

Finally, in 2018, I made another commitment to myself which has positive financial results. I decided to start taking my lunch to work more often than not. Again, it wasn’t really a money decision. Fast food and restaurant food doesn’t taste as good to me as my own cooking. It suddenly struck me one day that I was paying for food that I didn’t enjoy. Taking my lunch to work earns me a double-whammy: good food to eat and more money saved for financial independence.

Like Mr. Tako says in his article, these small steps don’t feel extreme. They feel normal. I didn’t try to do everything all at once. Knowing myself as I do, that’s a challenge that I would have failed. Instead, I added these changes gradually until I reached my satisfaction point.

How about you? What steps have you taken in pursuit of funding your own dreams?

(***Update 2024 – sadly, this website is no longer available.)

RRSP Season

It’s Registered Retirement Savings Plan season! From now until the last day of February, there will many advertisements all over the place exhorting you to make a contribution to your RRSP.

If you need more detailed information about the rules, then I would suggest that you visit the website for the Canada Revenue Agency. Alternatively, you can talk to your accountant or a financial advisor. This article does not in any way, shape or form constitute comprehensive accounting or legal advice about RRSPs. I am not a professional nor am I giving you any kind of investing advice. This post is a starting point for you to make inquiries, learn the basics, and take responsibility for your future by determining how to use RRSPs to your best advantage.

For my part, I really like RRSPs. I’ve been contributing to mine since I was 21 years old. Every year, I get a tax refund which is promptly re-invested for retirement or put towards an annual vacation. I’m very diligent about automatic transfers to my investment portfolio so I’m quite comfortable with spending my RRSP-generated tax refund on whatever my heart desires.

RRSPs offer tax-deferred growth. You can pick almost any kind of investment to put under the tax-deferred umbrella. On top of that, you might even qualify for a tax refund if you make a contribution. If you’re in a higher tax bracket when you put money in than when you take it out, you’ve saved money on both sides of the transaction.

Remember – it’s tax-deferred savings, not tax-free savings. If you contribute when you’re in the 33% tax bracket, then your tax refund is based on that tax bracket. If you’re in a lower tax bracket when you take the money out, say the 26% tax bracket for instance, then you’ll pay tax on that RRSP withdrawal at 26%. This means you’ll be 7% to the good. Woohoo!

In my humble opinion, RRSPs have many commendable benefits.

However, not every product is perfect. RRSP contribution room can be lost if you make a contribution and then withdraw the money outside of two very specific RRSP programs. Those programs are the Lifelong Learners Plan or the HomeBuyer’s Plan. In short, if you contribute $1000 to your RRSP and then withdraw that money outside of the aforementioned programs, then you cannot put that money back into your RRSP in the future. Unlike the Tax Free Savings Account, which allows for contribution room to be re-captured if a withdrawal is made, your RRSP contribution room is gone forever once you withdraw your money.

Another associated drawback to RRSPs, in certain circumstances, is the creation of a nemesis commonly known as D-E-B-T.

“How can an RRSP result in debt?” you ask.

It’s quite simple. At this time of year, banks love to give people RRSP loans. Customers borrow money, contribute to their RRSP, and then they’re supposed to use the tax refund to pay down the RRSP loan. Whether the tax refund is actually applied to the outstanding balance on the RRSP loan is anyone’s guess. The tax refund goes straight to the borrower who took out the loan and it can be used however the borrower wants it to be used. Concert tickets? Holiday? Extra mortgage payment? Cigarettes? The choice is limited only by the borrower’s imagination and common sense. There’s no requirement for the tax refund to pay down the RRSP loan.

In my humble opinion, failing to pay down the loan with the tax refund is most likely a stupid move because do you know what else belongs to the borrower? The loan payments! If the tax refund is spent on something other than the RRSP loan, the loan payments still have to be made because the borrower put himself into debt by taking out the loan in the first place!

Even if the tax refund is applied towards the RRSP loan, trust me when I say that the refund won’t be enough to cover the principal of the loan which means that the borrower is on the hook for the remaining balance of the loan.

Keep in mind that the banks aren’t lending you money interest-free. They might defer the interest on the first 90-days of the loan, in the expectation that you’ll apply any tax refund towards the debt, but don’t hold your breath. Way back in the Palaeolithic period when I worked for a financial institution, this is what my overlords did for the customers. I have no idea if this is still the practice. However, if you can’t repay the loan in full within the grace period, then you will be paying interest on your RRSP loan until it’s completely repaid.

The other big drawback to the RRSP loan is that it, more often than not, requires more RRSP loans in the future if a person is intent on funding their RRSP each year. A cycle of debt is created – this is bad. See, if you’re required to make loan payments on this year’s loan, then you’re most likely not setting money aside for next year’s RRSP contribution. If you had set aside the money in the first place, then there would not have been any reason for you to have taken out an RRSP loan. Following this logic, when next year’s RRSP season rolls around, then you’ll be more inclined to take out another loan to make your next contribution.

This is an ass-backwards way to set aside money for the future. Yes – make the RRSP contribution. No – do not go into debt to do it!

“So what’s your bright idea, Blue Lobster?” you ask.

It’s simple. Go to any bank’s RRSP loan calculator and enter your numbers. The calculator will spit out a loan payment amount. I want you to set up a transfer from your bank account to your RRSP in the amount of the loan payment. Maybe the calculator spits out a payment amount of $500/mth. If your budget can accommodate this number, great – contribute $500 to your RRSP every month like clockwork. Maybe your budget can only tolerate a monthly hit of $350. That’s fine too – you’ll contribute $350 to your RRSP each month.

The point is that instead of paying money and interest to the bank, I want you to contribute that money to your RRSP. If you were willing to pay the bank some interest for the privilege of borrowing money, then I see no reason why you won’t make interest-free payments to yourself.

Either way, you’ll be setting aside money for your future. Why not do so without going into debt?