Tag Archives: RRSP withdrawals

Withdrawing From Your RRSP

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A recent Bank of Montreal survey found that the amount we’re withdrawing early from our RRSPs has increased to an average of $21,000, and 40% of us are taking money out of our RRSPs way before retirement.

Why? The top three reasons are to pay for living expenses (23%), for an emergency (21%), and to pay off debts (20%). It’s a horrible idea for all three of them.

The survey inconveniently leaves out the fact that this figure of $21,000 includes the people taking money out for first time home purchases, which inflates the average by quite a bit.

But for those of us taking out money for bills, emergencies, and debt – don’t do it. I know it’s hard to breathe and even harder to sleep and function when you’re in financial trouble. I’ve been there – and I’ve done it. But take a time-out and look at every alternative before you kill your retirement money, because there are alternatives.

First, you think you’re solving a problem today, but you are creating three much bigger ones: Next April you’ll have to pay tax on that RRSP withdrawal. Since you clearly aren’t flush with cash now, you won’t be next April, either. You’ll also have tax withheld off the amount you’re cashing out. So cashing out $10,000 from your RRSP really only gets you 80% of it, or $8,000.

And finally, that $10,000 isn’t growing and compounding inside your RRSP anymore. In 20 years from now, that’s cost you around $30,000 in lost income. Out $2,000 tax withholding – out more tax next April, and out $30,000 or so when you get close to retirement. It’s an entire chapter in the Money Tools book called “Today’s problems become tomorrow’s nightmare.” Go down to Mosaic and invest the $20 in the book that’ll save you $35,000 or more in this example alone!

The book will also give you a ton of ways to solve your cashflow problems without killing your RRSP. You need to decide if the problem today is so bad and urgent that you’re willing to trade some relief today for significantly increased financial problems by not having that money when you’re retired.

Is your emergency a real emergency or something you can save your way into over a couple of months? Do you understand the math of paying off a debt today and how little that saves you when compared to five to ten times the cost of cashing part of your retirement savings? Can you take a deep breath and finally do a 15-minute budget to see where your money is going? Will you acknowledge that your current financial plan sucks and this is going to be necessary again unless you’re prepared to change some things around? Can you get an overdraft, instead? Yes, it’s a horrible idea, but better than the alternative you’re considering? How about taking it out of a credit card? No, it’s not a good idea, but the lesser of two evils even at 20%. Yes, there are more alternatives. I hope you read the “tomorrow nightmares” section of the book BEFORE you make the call to get the money.

George Boelcke – Money Tools & Rules book – yourmoneybook.com

Money & Dating Plus First Time Home Buyer Plans

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Spending and Dating

OK, since I’m single I have to keep up on these kinds of surveys. This one is from match.com and surveyed a ton of singles on their opinions on spending and dating. It turns out that men and women have very different expectations:

Men are three times more likely to consider the cost of a date.
On the other hand, 58% of women prefer a casual date, and not one that involves spending a lot of money.
While I’m guessing it’s not a big consideration for men, 53% of women do spend money before the date on things such as a new outfit, manicure, or stylist. I hope the date is worth that money! Or maybe it shouldn’t be called spending – maybe it should be called an investment…

For both sexes, 82% of respondents say their interest in the other person increases if they see an act of financial generosity. That could be many things ranging from a larger tip, or some kind of charitable giving.

On the downside, three-quarters of both sexes are turned off if they find out that their date has more than $5,000 of credit card debt.

First time home buyers:

With the requirement of a 5% down payment, and pretty high average home prices, it keeps getting harder and harder for someone to get into their first home.

I read some interesting stats the other day on using the RRSP Home Buyers’ Plan: Since inception in 1992, almost 2.5 million people have taken advantage of the program, with an average withdrawal from their RRSP of just under $11,000. In total, over $26 billion has been withdrawn from the program.

Over the past five years, the numbers and average withdrawal have both decreased. It may be a good idea to sort of borrow from yourself, but you have to remember that it’s money that is now NOT growing in your RRSP for retirement and you DO have to pay it back over the next 15 years. If you don’t, one-fifteenth of the total is added to your income that year, and you’ll be paying taxes on it. You also need to remember that this payback in on top of your new mortgage payment, utilities, property taxes, etc. Those are all likely to be a much larger part of your income now.

Who cares? Well, most of us do – or should. Almost 70% of Canadians own their own home – well, have a lender who lets them live in the home. And almost 40% of our entire wealth is tied up in the equity of our homes.

If the US government were a family:

Here is an interesting way of taking the staggering U.S. debt of over $14 trillion and breaking it down to figures we can understand:

This family would earn $58,000 a year, and spend $75,000, and have $327,000 in credit card debt. The proposing so-called “huge” spending cuts would cut expenses from $75,000 to $72,000 a year.