Reader Request: 10% Savings/Retirement & Where to put it (RRSP)

Got another RRSP question from a reader. Thought I’d post it so I can refer others here.

Ignore if you’re from the States. Thanks!

I have also been reading up on RRSP and investing in mutual funds. I know that you said the general rule of thumb is to put 10% away into an RRSP. Does this 10% mean saving for the future in general?

Like you will never ever touch it until you retire?

Basically, the rule of thumb is to save 10% of your net income. Period.

How and where you decide to put the money is totally up to you.

I don’t really like to give percentages because not everyone can save more than 10%.. but generally this is what I’d recommend doing if you can manage it:

10% = RRSP/Retirement Savings
You never ever touch it until you retire.

5% = Regular Savings
For short-term emergencies like you have to pay $20 to get a new driver’s license because your last one was stolen, up until about $5000 – $10,000)

5% = Emergency Fund
You never ever touch this unless you lose a job or get a medical emergency.

Save in this until you hit 6 months – 2 years worth of Emergency Savings (I’m at $36,000 for 2 years at $1500/month).

I’m way more paranoid so I save 50% of my net income, so I tend to fill up my Emergency Fund, Regular Savings etc.. a lot quicker than “normal”, but I scrimp in other areas.

Or something that is a little more liquid, such as an RSP or RRSP (not sure what the difference is) where you can use up to a certain amount of it as part of a down payment for a house, or for further education?

RSP = RRSP.

The full sounding out of the names are:

• Retirement Savings Plan (RSP)
• Registered Retirement Savings Plan (RRSP)

It means the same thing in the end because people use the terms interchangeably, but they shortchange the word “Registered” just to save on space.

I dunno why.

Just make sure what you put your investments in is definitely “Registered”.

And RRSP and RSP are not actually liquid investments.

You put the money in there, you don’t touch it until you retire at 65 (latest, 71). They are tax-deferred. You save the taxes on it now, but you get taxed on them later when you withdraw the money, including any money you may have accrued in dividends or income.

Canada has added a new thing called Tax Free Savings Account (TFSA) or Tax Free Investment Savings Account (TFISA). You get taxed on the money now, but you can put the money into index funds or investments, and any income you earn is not taxed.

FB Read: An Overview of RRSPs and TFSAs

As Money Grubbing Lawyer so eloquently put it:

An RRSP is the basket, not the fruit.

An RRSP isn’t something you can buy, it’s a place to keep the things you do buy. You can fill your RRSP basket with all sorts of investments, like GICs, stocks, bonds, exchange traded funds (ETFs), or you can even just keep cash in there to earn interest.

When most people say they are going to buy some RRSPs, they actually mean they’re going to buy mutual funds within an RRSP. Mutual funds are probably the most popular RRSP investment, but they’re also usually a suckers bet and tend to benefit financial planners more than investors. Don’t invest in mutual funds- you’re smarter than that.

FB’s Side Note about Mutual Funds & Suckers:

I think what MGL is referring to mutual funds is that consist of handpicked stocks by a mutual fund manager.

So for example, a mutual fund manager will pick Apple, Google, Exxon and invest your $5000 or whatever you put into buying a small share of those stocks of what the guy picked.

But they usually charge you a high MER (aka “fee”) for handpicking and choosing stocks for you to invest in, and 90% of the time, these investment manager-picked stocks don’t outperform the stock market. (Excluding Berkshire Hathaway run by Warren Buffett).

An index mutual fund on the other hand, is a really low-cost mutual fund that basically lets you invest in the stock market as a whole, and is a pretty simple way to invest in the market in general so that as the stock market increases as a whole (all the industries), so does your stock.

Low cost, average returns, meant for long-term investments.

It’s what I invest in, and what Warren Buffett (one of my heroes) suggests that an average investor dabble in.

FB Read: An Overview of RRSPs and TFSAs

As for taking the money out for your FIRST home mortgage only, or using it for education, that is just the government being all nice and sugary sweet to help you get ahead in life by tapping into your retirement fund.

But keep in mind, you gotta pay this cash back within a set period. Something like within 5 years?

Update: Actually it’s 15 years. Thanks Fabulous!

So if you take out $5000, you have to pay back $1000/year until the money is replenished.

AND on top of that, you lose the interest you could have earned on that $5000 in the 5 years you had the money out. Capisce?

What if you put money into an index fund, would that be considered as part of an RRSP? Or is that separate from the recommended 10%?

You COULD put the money into an index fund. An RRSP is a vehicle for investing.

FB Read: An Overview of RRSPs and TFSAs

And the recommended 10% as I have said above, can be used to include retirement savings.

I was reading your crash course on investing, and started to look into the fee’s that my company’s mutual fund charges and the choices of funds available. (We’re with Manulife Financial). The basic plans they offer have 1.2% IMF (is this the same as MER?). And the low interest money funds (or cash funds) have 0.8% IMF.

Yes. IMF stands for Investment Management Fee (IMF) which is the same as MER (Management Expense Ratio).

Same difference. They’re charging you money.

A 1.2% IMF is that they charge you 1.2% of a management expenses. A 0.8% is a 0.8% management expense charge.

That’s fairly cheap actually. 0.8% is not bad for a company mutual fund charge.

What you need to do now, is assess the mutual funds.

As you know, I like index funds.

FB Read #1: Why I invest in Index Funds
FB Read #2: Part of the FB Investing Series – The Simple Joy of an Index Fund

Can you explain what cash funds are?

A money fund, or cash fund, mutual money fund, or money market fund are all just names that represent a glorified high interest savings account (to me).

It offers LOW risk, with a GUARANTEED LOW returns.

You’re better off putting the money into a high interest savings account and earning 3% or so without paying for any MERs or IMFs.

Or you can put the money in Bonds, GICs.. whatever.

That’s just my opinion.