Caesar, a 37-year-old renter with $1 million in assets and an annual income of $170,000, is questioning whether he is putting too much money into retirement savings and employee stock. His annual expenses are only $46,000, allowing him to save aggressively. However, he wonders if the lopsidedness of his savings into a hefty registered retirement savings plan (RRSP) will make it more difficult to retire early in 10 to 15 years.
Caesar's Net Worth Breakdown
Caesar's net worth is distributed as follows: $30,000 in a bank account; $175,000 in a self-directed savings account; $400,000 in an RRSP; $150,000 in a tax-free savings account (TFSA); and $135,000 in an employee share purchase plan. He rents a two-bedroom apartment and moves frequently for career advancement.
According to Allan Norman, a financial expert, a hefty RRSP will not make it more difficult to retire early. Caesar is contributing to multiple account types—RRSP, TFSA, and non-registered accounts—which will provide flexibility later in life. Having diverse income sources taxed differently helps minimize tax and preserve benefits and credits.
Tax Strategies for Early Retirement
Norman explains that at retirement, Caesar will likely convert his RRSP to a registered retirement income fund (RRIF), providing a steady stream of taxable income. Non-registered accounts, which are not tax-sheltered, may generate taxable distributions, interest, dividends, or capital gains. Therefore, non-registered money is often used for larger lump-sum expenses or to increase spending income, and typically spent first.
Caesar should monitor his marginal tax rate and income levels that affect government benefits and credits. For example, drawing all income from an RRIF could push him into a higher tax bracket and reduce Old Age Security (OAS) benefits. Drawing a blend from non-registered and RRIF accounts can avoid this situation.
Using TFSA for Large Expenses
If Caesar has a large expense on top of regular RRIF withdrawals, his TFSA may be the best source. TFSA withdrawals are tax-free, so they do not increase taxes owed or impact government benefits or credits. While it would be ideal for all retirement income to be tax-free, that is not possible.
Norman advises that for current investment choices, the first decision is which account to invest in. With an annual income of $170,000, the RRSP is likely the best option. Caesar can contribute 18% of his income ($30,600) to an RRSP and receive a tax refund of $10,710 to $13,760, depending on his province or territory. He should use that refund to top up his TFSA, stock option plan, or non-registered account.
Balancing Living Today and Saving for Tomorrow
The article emphasizes the importance of finding the right balance between living today and saving for tomorrow. Caesar's situation highlights the challenge of determining whether aggressive retirement savings are excessive at age 37, when life experiences and opportunities are different from those at age 65.
