You see the ads everywhere telling you it’s time to buy that RRSP and save yourself some taxes. You’d be a fool not to, right?
Well, for many years I thought this was the case and I faithfully put in my RRSP contribution every year.
Then one day I took a step back and started to analyze the situation and I came to the conclusion that RRSPs were not for me.
Here’s why I stopped investing in RRSPs:
I don’t want to put my money into something I don’t understand. It’s that simple.
I freely admit I know nothing about stocks, bonds, equities, mutual funds, etc.
I don’t know how to make money ‘playing the stock market’ or currency swapping, or penny stocks, or whatever.
I know there are plenty of people who make very good returns in this world but I am not one of them.
So for this reason my RRSP money ended up collecting in a basic RRSP “high interest” savings account.
Because I don’t know anything about the equity markets myself, that means I would have to give my money to a stranger and let them invest my money for me. I realize that not everyone feels this way but this feels inherently wrong to me.
That said, I’m not totally opposed to the idea of giving someone else my money to invest, but in order to do so, they have to do as good or better of a job at investing it than I can.
My observation on the financial advisor industry can be summed up like this: there are 2 kinds of financial advisors: those who are just bank branch employees, usually fresh out of school and can put your money in a mutual fund or something and get you a few points, OR the independent advisors who are self-employed, manage a few hundred million dollars and can get you double digit returns if you’re lucky.
The kids at your local bank branch will take anything they can get. The big boys who know what they are doing will only talk to you if you have 6-figures to hand over to them but preferably 7-figures.
So I’m stuck: I’m not going to give my money to a kid, but as a newbie investor I’m also not going to hand over a huge sum of money to put it in something I know nothing about and would have to put an enormous amount of trust in the person to manage it for me.
As I said, because I don’t know anything about the equity markets, the RRSP money that I do have is sitting in a “high interest” savings account which is generating around 1% interest. Yes 1% Interest…
An interest rate that is lower than the rate of inflation means that I am actually losing money and I would be better off burning it so that at least I could generate some heat in this frigid Canadian winter.
This is something that nags me every day (knowing my money is rotting) and now that my money is virtually locked up into this RRSP I use it as motivation to invest smartly in the condo market so that I can let my future money atone for my past money’s sins [I’m starting to sound like Kevin O’Leary here…].
Many people think that RRSPs are some magical tool that makes your taxes disappear when in reality they are simply a tax deferral strategy.
Everyone has to pay the piper eventually; this is Canada after all.
If you are planning on making a lot of money while you are working and then much less money when you are retired, then RRSPs could make sense. Your marginal tax rate would be drastically reduced therefore you would theoretically pay less taxes in the long run by investing heavily in RRSPs.
But what if your income is high now and when you are retired your income is still high? Then you end up paying the same marginal tax rate on your money and so you might as well pay it now and then get that money out there and invest it today so that by the time you retire it’s been working for decades for you and is much larger than it is today.
A few questions I asked myself on this point:
1) Will I ever really retire? or will I continue working into my 60s and 70s. Probably I will never truly retire. I have an entrepreneurial spirit and I can’t imagine not continuing to work and add value to the world in some way. Sitting on a beach all day gets boring after a day or two.
2) How much will I be making in my retirement years? I like to think that I will be a high earner in retirement, therefore I will be paying high tax rate, therefore I will not save any money by deferring taxes. I’m 100% ok if I’m wrong on this point but I like to aim high! LOL.
3) Will tax rates in Canada go up or down over time? THIS IS CANADA. We pay high taxes and we always will. It’s part of the deal here. Taxes will continue to go up and that the marginal tax rates of today will have no relevance to the marginal tax rates of 25-30 years from now. So deferring taxes today at X% will likely mean that down the road I’m going to have to pay X++% on my money. Again, pay it now, get the pain over with and invest today.
OK so you get the idea as to why I stopped buying RRSPS. Now here’s why I prefer to buy condos instead:
Duh. This is what I do every day so I better be good at it and I better know how to make money doing it.
Ever since I bought my first condo in 2006 with $22K down and 3 years later I got a cheque for $100K (tax free) I knew that condo investing was the only thing I wanted to do with my money.
Since then, I have helped hundreds of people invest in the GTA condo market and collectively they have made millions of dollars through equity and cash flow. This is something I’m very proud of.
I’m not a control freak by nature but when it comes to investing my own money, I want to control the process 100%.
Picking which projects I buy into and when gives me absolute control over my investment dollars. If the project succeeds I take the credit, if it fails I take the blame. I can live with myself either way.
The idea of someone else making me money doesn’t excite me very much and the idea of someone else losing my money is my worst nightmare.
I love real estate. I live and breath it everyday. I love growing my own personal portfolio of properties.
To me and RRSP can never compare to investing in real estate for the basic reason of leverage.
If you put $50K into an RRSP, you own $50K worth of an RRSP (stock, mutual fund, whatever). If it goes up 10% in value you make 10%.
If you put $50K into a condo and that represents 20% equity, if the condo goes up 10% in value you make a 50% return!
Leverage is a very simple concept but for some reason so many people cannot understand it.
To me the worst kind of person is one who says something but does another. I put my money where my mouth is. Many of the projects that I recommend to my clients I also invest in myself!
It makes no sense to me to buy an investment from someone who is not investing in it themselves (or would not invest in it if given the opportunity and the means).
I stand behind what I sell but also, I stand behind the tactics and strategies for investment that I preach.