Tag Archives: cashing RRSP

Do You Have a 50% Credit Card Rate?

If that sounds insane, it really isn’t. Millions of Canadians have it – they just don’t know it!

Numerous surveys over the past few years show that one quarter of Canadians are cashing in some of their RRSPs before retirement. That’s more than 1.8 million people. Say it ain’t so as the old expression goes.

Two of the most common reasons for you to consider cashing in all or part of a retirement plan are to purchase a home or to pay off debts. Let’s assume you want to cash in $5,000 to pay off a credit card. The first thing you pay is a 10% penalty right off the top. So you’re actually getting $4,500. Then this amount is taxed, as if you made that money as income. In a 30% tax bracket, that’s another $1,350. So the bottom line is that the $5,000 you cashed in is really only $3,150 of net money going on your credit card. Sure, it’ll save you 20% interest on the card, but that’s not the whole story.

That money is no longer growing in your RRSP (or your Tax Free Savings Account). At a 10% return, that $5,000 would have doubled every seven years. If you’re in your 30s, you’re now missing around $160,000 at retirement. If you’re in your 50s, that $5,000 still would have doubled three more times, which is $40,000 now gone.

While you’ve now been able to pay just over $3,000 on your credit card, it likely didn’t pay off the balance. That’s bad enough with what it’s cost you in foregone investment income. Now to make things worse, the majority of people keep using that credit card again! Odds are, you’re in the majority where you’ll be back to an average $7,000 balance within two years.

That puts you back to paying 20% on your card while you’re out at least $40,000 in savings for the next 20 years. The bottom line: Your credit card is then costing you more than 48% interest. While you were hoping to make things better – they got worse – a lot worse.

On the plus side, how would you like a zero risk 28% return on your money? It’s easy: Just pay off your credit card. The 20% interest rate you pay is with after-tax money. So the real rate is over 28% if you carry a balance. That’s the biggest reason trying to save at the same time you’re trying to become debt free doesn’t work!

A Big-Picture New Years’ Resolution

Happy New Year and good riddance to 2020!

Meet the tree-year old who has inspired my one and only New Years’ resolution this year:

My duplex backs onto a park and skating rink. I’ve now seen this tiny guy a number of times. To a three-year old of his size, the rink must seem the size of Europe. Watching him New Years’ day for about 15-minutes, he probably fell down at least 50 times. But he always got up. Sure, sometimes he rested on the ice for a bit and sometimes dad would skate over and he could pull himself up on dads’ stick. But he always gets up.

For arguably the majority of people, the pandemic that’s now in its second calendar year, is only an inconvenience. Maybe it was working from home for a while, or still missing the routine of restaurant dinners with friends, concerts, or a hockey game.

But for millions of us, including us self-employed and their staff, other peoples’ inconvenience is our nightmare – and not just in financial ways. Sure, lots of people can (and have) file for bankruptcy – but bankruptcy does not create income! Only the return to a healthy economy creates income.

With no immediate end in sight, millions of us have to keep getting up – have to keep positive – somehow – some way – for some time to come.

What’s the definition of “getting up?” That’s different for everyone. Maybe it’s deferring one more bill. It might be cashing one more RRSP, or hoping that the Canadian Recovery Benefit will be changed for vast numbers of people who will max out in March and be cut off. Maybe it’s asking for help – one of the hardest things to do.

I don’t know about anyone else, but I know I can’t get up 50 more times. But I’m pretty sure I can get up one more time – from one more setback – from one more nightmare of a week. And maybe one more time after that if I keep the image of that little three-year old in my mind.

The New Financial Reality Part II

Two weeks ago we talked about what to do: Getting the family involved, stopping any savings and investments, and your financial priorities of prescriptions, food, shelter, utilities, basic clothing and transportation.

However, the reality of $4,000 in bills on $2,000 of income brings up three big “should you” questions:

Should you pay minimum payments on your credit cards? If you can – absolutely. If you have the available credit, I would also take a cash advance then use that money to make the minimum payment. It’s not a solution, but it’s a way to tread water and protect your credit rating. If you can’t – plan B may be to ask the card issuer for a deferral, but that depends on how much the minimum payment is, whether you’re prepared to go through the qualifying again on the phone, and your priorities.

Should you get some money out of your investments or Tax Free Savings Account? Yes – if that’s what it takes to make minimum payments for some of your debts. It’s better to borrow from your future self than a deferral that just stalls things off and compounds interest.

Should you cash some RRSPs? That’s different than other investments, because there are big tax implications next April since it’s considered taxable income for 2020. If you have absolutely no choice – the answer is clear. If you can avoid it for at least another month or so – that would be even better…

There is a really important chapter in the Money Tools book called “Today’s problems become tomorrow’s nightmare.” Before you cash any of these, you really really need to read that chapter.

When you need to relieve the today pressure with tomorrow money, there’s a steep price to pay down the road. Cashing any investments relieves the financial pressure today but leaves you in trouble down the road. Not investing right now is totally logical, but cashing out requires you to remember that the $5,000 today isn’t growing anymore for retirement. That $5,000 today, if left alone, turns into $40,000 that you do not have in 21 to 25 years when you may really need it.

Secondly, the government programs of the $500 a week or your EI are fully taxable. So the today help is great, but you will need to pay tax on that come next April. No, you probably can’t set aside the 20 to 25% you’ll need for tax today. But you also can’t claim that it’s a surprise you’ll have to have the money to pay your taxes.

Lastly, something a little more hopeful if you have a mailbox. I found a great picture that might prevent you from getting more bills that you don’t really need right now. Oh if only that would work….

Withdrawing From Your RRSP

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

Want To Invest or Need to Cash Your RRSP?

Last week, the home improvement giant Lowe’s made a $1.7 billion offer to buy Rona. If you owned the stock, it immediately went up to around the offer price of $14.50 a share. Nice deal – but it doesn’t change what we’ve always talked about: Buying an individual stock is gambling and not investing. You’re betting on the 5th horse in the 7th race! Don’t do it.

Good growth mutual funds with a long-term track record are investing, as is a five year or longer time horizon. If you’re buying one stock, it’s gambling. If you know that – do it. But don’t do it with your RRSP money. Do you need a reminder about the Facebook stock offering now down about 40% or the Zynga hot stock down 70%, and not done dropping yet, or a bunch of others?

I do have to confess that Monday I had hoped Rona would just close their doors. Four people in the North East Calgary store wouldn’t do a thing to help my brother and myself. In my experience, Home Depot’s slogan should change to: You can do it and…well, good luck.” But Rona? When my kind and patient brother, who’s a Pastor, walks out, that’s a real problem. That kind of customer no-service is on par with the no service banks and cell carriers!

Fortunately, the fourth Rona store later, I ended up on MacLeod Trail in Calgary and met Angie and Dana. Over one hour these two ladies helped me locate a large amount of shelving AND found it in stock about a mile up and eight isles over. Part of my life is teaching seminars on customer service all over the world. Now I have two Rona stories, but if you’re in and around Calgary – make the drive to the McLeod Trail store, even if you’re in the North East!

Step Away From That RRSP!

According to a recent survey from Scotiabank, a quarter of all Canadians are actually cashing in some of their RRSPs before retirement. Say it ain’t so as the old expression goes.

The three main reasons given are to purchase a home, which is the homebuyer plan, under which you are essentially borrowing the money from your own RRSP and using it for the down payment of your principal residence. Then each tax year, you’re required to pay one-fifteeth of it back until it’s all back in your RRSP. That might be fine – it’s kind of like borrowing from yourself, even though you’re out the interest accumulated.

The other two main reasons are for daily living expenses and to pay off debt. THAT is a problem. Here’s why:

Let’s assume you want to cash $4,000 to pay off some old bills. The first thing that happens is that 10% is deducted as withholding off the top. Because you received a tax deduction when you made the contribution, you now have to pay tax to get it out again. In a 30% tax bracket, $1,200 comes right off the top as withholding. So the bottom line is that this $4,000 you wanted is really $2,800 in your pocket. With me so far?

It gets worse. So it’s saved you some interest and financial pressure to pay off these bills. But you no longer have these savings growing and compounding and here’s what you’re really out:

This $4,000 left alone would double every 7 years at just a 10% return. So today’s $4,000 is $8,000 in 7 years, which is $16,000 in 14 years and $32,000 in 21 years. Nothing for you to do but sit back and watch it grow! That is if you hadn’t cashed it.

The bottom line? You got your hands on $2,800 and it’s cost you $32,000 just 21 years from now. It’s one of the most expensive ways to get your hands on some cash.

Yes, people do it – but there are lots of ways to relieve the financial pressure and NOT cash the RRSPs. After all, knowing is always better than hoping and a $20 investment in the It’s Your Money book to get the tools and insights has to be better than being out $32,000.

You are robbing a lot of tomorrows to pay for yesterday – don’t do it.