Confused about retirement savings

Question: I have a question about retirement savings. I have been advised by many that the most efficient way to save for retirement is via RRSP contributions. Others, however, have warned about the pitfalls of retiring with too much money accumulated in my RRSP. They argue that too much accumulated RRSP wealth results in RRIF payments that are so high that you get instantaneously placed in the highest tax bracket and pay ridiculous amounts of tax every year indefinitely. They recommend accumulating wealth in the form of your primary residence instead. This would be a far more tax-effective retirement planning strategy since any money earned from appreciation of the house is tax-exempt.

Can you help clarify the pros and cons of this approach? – D.F.

Gordon’s answer: It’s interesting that you have friends who worry about retiring with too much money. Most retirees would love to have that problem.

That said, I have encountered a few people who complain about the high taxes they have to pay on their RRIF withdrawals. I have little sympathy for them. They got tax deductions when they made their RRSP contributions plus the benefit of years of tax-shelred growth. As a result, they’ve become very wealthy (if they hadn’t, they wouldn’t be complaining about high taxes). Well, guess what — there’s no free lunch. You have to pay at some point.

I will never argue with advice to build home equity. But when you retire, you are going to need cash flow. That means you will have to tap into that equity in some way, either by selling the home or by borrowing against the mortgage. There’s nothing wrong with that but most people would be more comfortable having more than one asset to depend on.

My advice is to build an investment portfolio to go along with your home equity. If you are really worried about future taxes on RRIF withdrawals, pay the tax now and create a non-registered portfolio with after-tax dollars. You can tap into that any time you want.

If your answer is something like “But I don’t want to pay the taxes now”, keep in mind that’s exactly what you’re doing when you build your home equity. You’re paying off the mortgage in after-tax dollars. The principle is the same; the only difference is the type of asset you’re buying.

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