Blog

By: Shawn Todd CFP

We’ve all heard terrible financial advice at one point or another.

It might have been in the locker room at hockey, around the coffee machine at work, or even from a friend.

“Your most expensive advice is the free advice you receive from your financially struggling friends and relatives.” – Robert Kiyosaki

“Max out your credit cards to build credit.” This advice suggests that fully utilizing your credit limit will enhance your credit score. In reality, high credit card balances can lead to significant debt and negatively impact your credit rating. Terrible quote. Can really start someone off on a terrible foot.

“You don’t need a budget.” Some claim that budgeting is unnecessary. However, without a budget, it’s challenging to track spending and achieve financial goals, often leading to overspending and financial instability. I see this so many times. 80% of people just don’t take the time to write this out.

“Renting is throwing money away.” This advice implies that homeownership is always superior. However, owning a home comes with significant costs like maintenance and property taxes. Depending on individual circumstances, renting can sometimes be the more financially sound decision. A strong belief by many. Last time I did the math – I believe you are fine renting for about 7 1/2 yrs before seeing a crossover on benefit / cost. So no need to rush. Ownership over long term can help with wealth building in most cases though.

“You should buy as much house as possible.” Encouraging individuals to purchase the most expensive home they qualify for can lead to financial strain, especially if unforeseen expenses arise. This is terrible. I had a friend tell me this in my 20’s and all this mantra did was produce stress to buy a big house. This carries no great value to it,

“You don’t need insurance if you’re young and healthy.” Neglecting insurance due to youth and good health overlooks unforeseen events. Accidents and illnesses can occur at any age, and lacking insurance can result in substantial financial burdens. Again terrible advice. Many insurance disbelievers [and there are groups of financial advisers of the same thinking] that minimize needs for insurance, particularly for younger people. Getting approved mid 40’s and 50’s with high cholesterol and heart conditions can be difficult. Having the proper coverage starting young isn’t a bad idea at all.

“Always go for the cheapest option.” Opting for the least expensive choice isn’t always cost-effective in the long run. Investing in quality can lead to better durability and value over time. I see this a lot with investment discussions. I won’t argue the merits of trying to find affordable and cheaper investment options – that’s reasonable. Some believe that cost is the most important part of this conversation on any topic – and this isn’t always true. No matter if you are discussing investment options, insurance, the fee for advice from an accountant, lawyer, or financial planner…or a nice dress shirt. Or flowers for your spouse. And definitely do not take the cheapest rock-climbing course, or scuba diving course. You can see where this is going. If I have an option between a hand made, professionally inspected custom parachute for $500, and a machine made parachute [that everyone else is doing] for $99 that all of the articles assure me do the same thing, sometimes its worth just looking a little deeper at the more expensive parachute. Sometimes.

“You don’t need to save for retirement yet.” Delaying retirement savings can significantly impact your financial future. Starting early allows for compound interest to work in your favor, building a more substantial nest egg. This can really be costly. Delaying too long will back you into a corner that will cost you tens if not hundreds of thousands of dollars more.

“Follow your passion, and the money will follow.” While pursuing passions is fulfilling, it doesn’t always guarantee financial stability. It’s essential to balance passion with practical financial planning. I’m a big follow your dreams guy. I think this speaks to balance. Just opening the door, walking outside and declaring to the world you biggest dream, isn’t going to do it. Passion is important. Paying bills & saving – also important.

“Co-sign a loan to help a friend or family member.” Co-signing makes you legally responsible for the debt if the primary borrower defaults, potentially damaging your credit and financial standing. Scott Terrio – will lose it if I don’t mention this here. This has a small space in the terrible advice section here for a reason. So many make this choice without understanding what this really means. It’s not just a favour.

“You can’t get rich working a 9-to-5 job.” This mindset undermines the potential of disciplined saving and investing. Many individuals have achieved financial success through traditional employment by managing their finances wisely. So wrong. I see lots of manual, very traditional 9-5 job employees have significantly more wealth [monetary, family and life] with their situations. Working endless days does not equal financial freedom. Decision making does.

“Always follow your instincts when making financial decisions.” While intuition can be valuable, relying solely on gut feelings without research or professional advice can result in poor financial choices. We are wrong too often to rely on this. Sometimes the gut check is a big saviour. Sometimes it also will devastate you. This is where all those buying into weed stocks should please leave a comment below.

“You should get a credit card as early as possible to build credit.” While establishing credit is important, obtaining a credit card without understanding responsible usage can lead to debt accumulation and financial mismanagement. Credit is important. Living under debt =not important. Please be cautious.

“Investing is only for the wealthy.” This misconception prevents many from taking advantage of investment opportunities. Starting with small amounts can lead to significant growth over time through compound interest. Growing up, the only people I saw who invested were the ‘wealthy’. I feel this is where good planning, and good advice fits it. There are so many who should be investing, to build their own wealth. It’s often a missed strategy for so many.

“You should always aim to retire with $1 million in the bank.” Setting an arbitrary retirement savings goal without considering individual lifestyle, inflation, and future needs can be misleading. Personalized planning is essential. What will help someone else’s situation, may not help yours. This might work if you have no debt, and a decent lifestyle. If you are a spender, and carry debt, and want to retire earlier – this advice won’t be helpful.

“Borrowing from your retirement fund is a good way to handle short-term financial needs.” Tapping into retirement savings can jeopardize your future financial security and incur penalties, making it a risky short-term solution. Ripping out long term money to pay off the hot tub, vacation, or house reno you just did is terrible decision making, and bad advice all around. That $10,000 you removed from your RRSP at age 30 to do one of the above – will only get you $7,000 in your pocket, and would have potentially grown to $76,122 by age 60. That was costly.

I’d never shy away from listening to advice around the coffee shop. Great friends, great people – they all want you to hear what they have done. Listen, learn, act wisely.

My thoughts on this today –

By: Shawn Todd, CFP

Many of you will know that throughout my life, I haven’t minded risk at times.  Before I was 35 yrs. old, I was a police officer, I was a diver with the OPP Underwater Search and Recovery Unit, and I was an Explosives Disposal Technician. I’m currently a business owner [a lot of business owners have an appetite for risk]. I downhill ski, I have a motorcycle, and I’ve climbed Kilimanjaro with my spouse Michele.

I imagine many of you have your own interests. You enjoy sailing, or camping, or travelling overseas. Flying to see family, swimming at the cottage, or having a steak on the BBQ. Some may enjoy biking in the city, ice skating on the canal, or smoking a cigar. Risks show up all over, and we all don’t enjoy talking about it.  We like the excitement of a ski weekend getaway in Tremblant, but we don’t enjoy talking prior to the trip about the potential of breaking our leg.

When I first came into the financial planning and advisory business eighteen years ago, that version of myself believed that insurance would be the least interesting part of my work. I spent hundreds of hours researching investment portfolio theory, financial planning, marketing, building a business, but the very last thing that I felt was needed by most up and coming young professionals was some of the insurance products that I was learning about.

I was dead wrong.

Five years into my financial planning career I had a terrible ATV accident while out with friends and clients. I broke my back in five places, split my liver, broke three ribs, tore my adrenal gland and almost died in a field in Calabogie, Ontario.  It was the scariest moment of my life. I had just met the person I have always wanted to be with, and I had children to care for.

Today, eighteen years after beginning as an advisor, I have had had several important and close clients experience terrible and demanding situations. I’ve lost some great clients and friends to a variety of illnesses, accidents, and situations. No one was planning on not being here in 20 years.

One of the things that strikes me as incredibly common about both my experience, and the experiences that I have had with clients, is that its difficult to talk about what might happen if we get sick, or if we die. It’s terrifying.

In my time as a financial planner, I have picked up a great deal of more experience and knowledge since my beginning days as a new advisor. I have seen well planned out life insurance policies provide enough income to a family after the unexpected loss of spouse. I have watched planned gifting to children and grandchildren that has allowed full lives after a loved one’s passing. Business owners have used it to ensure security while their business started, and while success ebbed and flowed. Professionals have used it to protect their occupation and income. Tax planning has allowed it to be used as a formative tool in dealing with business owners, passive income strategies, or dealing with terminal tax.

There are a few distinct things that talking about risk, and protecting ourselves, can provide.

• It can remove a lot of stress from your life. No more worrying about what happens [even if you don’t want to talk about it normally]
• It can help provide income to you or family members if you are sick, injured or die.
• Some may be able to pay off debts.
• During key parts of a financial plan, it can provide a great deal of stability for income and assets needed to achieve goals.
• It can be used as an opportunity to diversify how you invest or use business capital.
• Its usage may help in minimizing taxes – both now, and later
• During business growth periods it can provide a great deal of security to the business, the shareholders, and their families.
• For some it can offer an ability to gift to children, grandchildren, or even charities that are important to you.

While 92% of people believe talking with family and loved ones about the end of their life is important, only 32% do. [ Seattle Times – “Why don’t we talk about death” May 2019]

To conclude…

It may well be time to begin opening the conversation about your own risks. What risks do you have in your life that you are most concerned about? How would they affect your financial plan, or financial integrity? Are there opportunities you should consider for your business, your own portfolio, our own situation? If you didn’t speak about your risk concerns – would the situation have changed for the worse of the better in ten years time?

Speaking about risk, and what may come may be difficult for most. There is never a better time to start this conversation than today.

Just my thoughts for the day.

By: Shawn Todd, CFP

Most of us have golfed at one point or another during our lives. It may have been once, or it may have been many times throughout the summer. No matter how often you have golfed you will always remember the feeling of a firing a shot into a bunker [when you were going for the green], or just firing a ball into the water on a par 3. It’s tough, and it really starts to take the fun out of the game.

Most of the people reading this will have also invested at one point. Your home is one of your largest investments, and you may have several other investments in your portfolio. If you’ve been doing it as long as I have, then you also will have memories of the tech wreck, the financial crisis, and the market correction during Covid.

What does golf and investing during these market corrections have in common?

A well thought out gameplan.

If we approached golf without any consideration for the inherit risks of the game, well we would just feel the consequences. We’d lose a ball here, bogey there, it would be a miserable experience.  Some of us all can feel that pain. Playing the game more smartly, hitting more fairways, staying out of the bunkers, well of these efforts make for far better results.

Investing needs to be focused, and well thought out. Ensuring you understand the risks of the portfolio you are in, the timelines you have, the goals of each portfolio, and the risk of each investment in your portfolio; is incredibly important. There needs to be a well thought out plan for taxation, capital gains [this is the topic of the day – thanks to the recent budget], and a discussion of the solutions that make the most sense for each investor. Often what works for you, may not be what works for your neighbour or colleague. Like golf, we all have different risk tolerances, capability, and performance needs. You need to play your own game, and your own pace.

Unlike golf – there are some great opportunities that will enhance your experience. Portfolio management, risk management, diversification, and a deep understanding of your needs – will all allow for an exceptionally smooth ride.

Imagine golf is someone could just tap your shoulder right before you started your ill-fated swing and said – “I just wouldn’t take that shot”.

It might make the game a lot more fun.

Consider helping your investing experience by adding a professional wealth management team to help you understand your own gameplan.

My thoughts for the day.

By: Shawn Todd, CFP

There are lots of ways to spend your time.

In fact, I find there is just no end to how we can use it.  It can be spent reading, hiking, watching TV, time with friends, playing boardgames with your family, a sport you love, or you can literally watch time pass doing very little – if you choose to.

When I spend time with a variety of business owners, or growth minded clients – having a conversation about what is most important to them, a majority of time they will always write down that family is the most important thing to them.  Everything they have built or spend time doing during their day – is all done with the intention in appreciating, supporting, or helping their family.  This makes sense – it is their most cherished part of their life.

Surprisingly, even though all the activities they are doing are meant to help their family, this is not necessarily where they are spending their time.  This speaks to me as I’m also guilty of this.  I’m going to give full credit to my spouse Michele for showing me a great values exercise that came up in conversation a few years ago.

When wanting to consider if you the time you are spending in your life aligns with your values – then write out two columns.  Write your values and things that are important to you – in one column.  Write where you are spending your time in the second column.  Rate each of the values that you have on a scale of 1-10. How important is being dependable to you?  Love? Health? Self-Improvement?

Now compare what is most important to you, to how you are spending your time.  Are they aligned? If not, are there areas of your life that you need to reconsider or change?  Do you need to consider adjusting some of your routines, or being more focused in other areas?

Spending time reviewing my own values, and they way I spend my own time has allowed me to begin [its not perfect yet] aligning my time with what is most important to me.

Living well begins with ensuring you are spending your time doing the things that will best advance your life in the way you really wish it was moving.  This exercise may help as you contemplate your life goals now, and in the future.

In a recent article “97% of retirees with a strong sense of purpose were generally happy, compared with 76% without that sense” – the Retirement Manifesto 2023

Even spending time reading this article is conscious decision on how you wish to spend your time.  Should I read this article, or should I go for a walk outside?

There is no end to how we spend our time, and I hope this helps in all of our efforts in spending our time well.

Just my thoughts for the day.

Shawn Todd CFP – Partner – ECIVDA

By: Shawn Todd, CFP

Being a business owner is exciting.

You’ve thought of an idea for a business, made it work, helped it make its mark in whatever you do. It also brings with it challenges that can be overlooked as the business grows.

The topic that gets avoided

If you are a business owner and have avoided talking about what happens in the event of your business partner’s sickness or death – then you aren’t alone.  It’s a tough topic, one that gets avoided a lot. Talking about death and sickness is tough, and it’s hard to bring up.

It’s a common situation we run into often, where a business has been started with multiple partners, and it is now running smoothly, and may be experiencing some strong success.  The balance sheet may be positive, and the owners may be enjoying some smoother sailing than when the business first started.  If we broke down business growth into four time periods – early, growth, expansion, and mature times.  We often see this issue first, once the business hits a strong growth period, and achieves higher valuations of the company than owners expected.

What happens if a business owner dies, gets sick or injured and cannot look after the business in their capacity?

The shareholder’s agreement & buy sell agreement

Some of these initial pains to these questions can be somewhat worked out within the shareholders agreement and a buy sell agreement between the parties.  Some questions that a shareholder’s agreement may help solve will be; what responsibilities do the parties have to each other, when is a sale triggered if there is long term sickness, what happens at death of a shareholder, and some key discussions on evaluation and its formulation.  A buy sell agreement helps ensure this sale happens after death, or a triggering event.

The most common issue I see on this topic with business owners is an unfunded shareholders agreement. Often it has been talked about, but not put into place or solidified.  In the event of a shareholder’s death – normally the corporation would be expected to pay the estate of the deceased shareholder [in return – take back the shares], or there would be a well laid out insurance plan to offset this immediate cost, pay the estate, and have the shares returned in exchange.

In this example above, if Phil was to become sick long term or died, then Phil’s family or estate would be expecting a value for Phil’s shares. Ideally Olivia would rather not be in business or be left making business decisions with Phil’s family. What happens if the corporation doesn’t have enough to pay the value of Phil’s shares to the estate, or if there isn’t an insurance policy in place?

How to fix

There is a variety of ways to fund a shareholder’s agreement, the most common being with an insurance policy.  The policy can be paid personally or corporately, but the most common and most popular [for obvious reasons amongst owners] is to have the corporation pay the premiums.

Insurance policies can be set up to provide coverage for death of a business partner, loss of income due to disability, injury, or a critical illness such as Cancer.

It’s not too late to spend time with your business partner(s) to discuss these ‘what if’ situations.  Planning on what happens if a shareholder has to exit [especially under terrible & stressful circumstances] is a great way to strengthen your business in the back-end, and lower any fiscal risk.

Let us know if you have any questions, or please book a time with us to review your own shareholders agreement.  Click HERE!

Shawn Todd CFP – Partner – ECIVDA

By: Shawn Todd, CFP

Just before the New Year of 2023 – I was fortunate enough to go for a short adventure trip with my wife Michele, where we planned to do some extraordinary hiking in Arizona.  The first thing I did when I packed for my trip on the days we hiked – was making sure that I had packed a GPS, a compass, enough water, and had a plan.  It sounds simple, but you’d be surprised on how many people venture out with just their shoes.  I saw many with no gear, or the wrong gear.

Some short stats:

• 57.8 million hikers every year in the US.
• There are 4 deaths per 100,000 hikers
• 70% of hikers who die are male

Looking at these stats – right away it becomes a very good message to me that not only should I be careful, but I should always be packing a compass.  I’m male, I hike, I Iove my wife and family, and I’m planning a hiking trip.

When it comes to our personal lives, and our business lives, it’s very easy to overlook what you need to be packing in your ‘day to day’ backpack.  It’s very easy to be comfortable with life ‘as it is right now’. The home & your after-hours routine, and your work & your normal ‘day at the office’ routine all flow one day to the next without any issues.  Sometimes we neglect how each of these affects the other. How impactful our personal lives are with our work, and how significant a role our work plays in providing comfort in our personal lives.

The merging of our personal and business lives give way to four key themes on this Venn diagram above. These dual areas are:

Time – how much time can we spend with our loved ones, what kind of quality time is it?  How much flexibility does our business provide us, how hard have we worked to have it be this way?

Security – Our business without questions provides the security for us to make decisions that affect our spouse, our children and ourselves.  Where are the children going to post-secondary school?  Do we need to have two incomes or just one in the home? What will happen if one of our family is sick and needs care? Does our life feel safe and secure?

Income – We all start off with a life wanting to not be only concerned about money.  You may be more interested in your community, in charity, in just time with loved ones.  The income that comes in now, and the income that may or may not come in – if you weren’t working – will impact most of the decisions we make with the other three areas – time, security, and our goals.

Goals – This is where it’s always interesting.  Every single person has different goals, different needs, and different wants.  Spending a great deal of time here, really helps with a good foundation to mapping out where we want to go in life [and mapping out what trails we want to explore on that hike]

Many times, when we meet new clients – and we ask – “would you like us to spend time doing financial planning for you personally, and also for you corporately?” they may feel initially positive about it, but also feel slightly tentative about planning twice.  Why would I need to do this?

Some more short stats:

• 96 percent of small business [with 1-100 employees] survive for one full year
• 70 percent of small businesses [1-100 employees] survive for five full years
• There are over 1.3 million businesses in Canada with employees
• Small businesses provide over 70% of the total private labour market
• A healthy growth rate for a small business should be between 15%
• A business will double in 5 years at a 15% growth rate
• 350 people out of 100,000 [ages 45-49] will be diagnosed with Cancer [87 times the chance of dying hiking]
• 1,000 people out of 100,000 [ages 60 and older] will be diagnosed with Cancer [250 times the chance of dying hiking]

Spending time planning can’t take away all the risks of business failure, of financial stressors, or of getting a critical illness that impacts your business. It certainly can help make you aware of your blind spots.  Having an opportunity to see the risks, whether they are in your investment portfolio, in providing enough retirement income, or possibly in your business structure – really help make you more aware of your current situation, and your future situation combined.  You wouldn’t go on a hike without the proper gear, and I wouldn’t suggest you tackle life and business without the proper gear.

Take the time to review your own strategy and plan. If you’re unsure on areas, or need guidance, consider having a finanical plan completed, or updated.  Keeping both your personal and corporate worlds safe is key.  If you need to pack a compass to stay on track, I’d certainly recommend doing so.

Just my thoughts for the day,

Shawn Todd, CFP

I’ve been reading a lot of material in the past few weeks about posting content on Linked In. The last few articles that I have written, have been received with moderate success from the financial planning community. I absolutely love getting onto a topic that I’m passionate about, and helping people connect with what might be a new way of looking at things! Ottawa local and Linked In guru Michaela Alexis preaches vulnerability in her article 5 Must Read Tips for Writing a Killer Linked In Article If you haven’t had a chance to read this article – and are interested in writing content – it’s a really great start.

So let me be vulnerable.

In May 2011 on a day long ATV ride ride with some friends, colleagues and clients in the Calabogie area – I had a terrible accident. It was probably our fourth or fifth annual ride with about ten riders. I had just spotted a beautiful long hill in a sandy field, and I was determined to drive my ATV up to the top to have a look. Half way up this rolling hill the ground just ended – it was a cliff. With absolutely no time to react – I went over the side of the tall cliff first (large unforgiving 800lb ATV came second), and the ATV fell with me landing hard right on top of my back. Immediately, I knew I was badly injured. At the end of the day – I had broken 5 vertebrae, 3 ribs, and split my liver.

So I’ve gotten the accident out of the way, and this helps with the setup of this article. I’m really trying to let you in on what was happening for me the moments after that accident. I was absolutely terrified. Not only was I worried that I may not survive this incredible accident, I was worried as I had a family that I wanted to get back to. I had three kids to raise, and when my beautiful girlfriend (now my amazing wife) walked in the hospital room – it gave me all the energy I needed to get charged up to start my mending!

Once the dust settled, and I had days and days of lying and healing – there were a few things that I really had on my mind;

• If I end up not being able to walk again – will I have enough income from my group and disability plans?
• Was my will set up the way that I wanted it? Does it contain my last set of instructions in the way that I really intended?
• What would I change about my life insurance and risk plan if I could?
• Would I be able to climb Mt Kilimanjaro with my girlfriend? (we had just made plans and booked our trip)

Months later – I had healed and made a recovery.

So I’ll be honest with you – I didn’t have enough set up for my disability plan (and would have probably had to live a life I wouldn’t have enjoyed), and my will and life insurance program needed some tweaking. Sometimes, we get a good bounce in life – and this was my second chance.

I’m going to share with you the reasons why I reviewed these questions, and set up a robust insurance program after my accident;

1. I have a family that I absolutely love. My wife and my kids are what gets me up in the morning, and what keeps me inspired every single day. Sometimes we’re busy, sometimes we’re laughing and goofy, and sometimes we’re all doing separate activities (especially as the kids get older). At the end of the day – what we have in our home is my entire life.
2. It’s the best way to have a couple Million dollars sitting on the sidelines when you need it. I once had a client ask me to build him a financial plan – “but please don’t use life insurance – I don’t like it. So I did. I built a beautiful financial plan – and it showed a need to save $17,000 / month for five years (and assumed that he didn’t get sick or die for that period). It wasn’t a hit. He ended up liking the insurance in the plan – and it ended up saving him a lot of money. I enjoy having knowledge that when I need it – regardless of how much I’ve saved, or where I am at in my life cycle – the money will be there.
3. I don’t like spending money when I don’t have to. Structuring my plan right made it cash flow neutral. It may be a monthly expense – but having return of premiums or some cash value features allowed me to have a plan that returns this to me later on. A typical 35 yr old could easily spend $20,000 – $30,000 on premiums between now and retirement age (as an net negative expense) or they can re-arrange what they are doing and make this neutral, or an treat it like an investment, and come out with thousands in savings, and a nest egg.
4. I’m a business owner. I like risk, and growing my business. Some elements of my world I can’t afford risk. My business, and my income is one of them. Walt Disney wouldn’t have been able to keep trucking on his Disneyland idea without it – a good read here What? Walt Disney used Life Insurance?
5. I enjoy travelling, having goals, and just simply not worrying about uncertainty. It’s incredibly re-assuring to be able to book that scuba dive trip, or take a hike on a beautiful Caribbean island without worrying about mortality.

6. It’s immediate. Sometimes you just don’t get that second chance. It’s the ATV day with your pals, or it’s that golf game with your friends. It may just feel like another day, and give you no second thoughts. Sometimes and somewhere – your day doesn’t end the way you wanted. On an average, we are supposed to be here until 85 yrs of age, but sometimes we get sick, a medical result comes back we didn’t expect, or someone runs into our car. It can be totally unplanned, unexpected, and change of world forever. It might mean your income ends, or it could mean you don’t go home (ever). Having an insurance plans allows me to know that (a) the money is all there (b) every person that I love has something I wanted them to have (c) if I live through whatever terrible day I’ve had – I’m going to have an income (and then I can start with my game plan on recovery and overcoming whatever has just happened)

By the time I was done healing I had renewed my insurance strategy. I talk about this day with my clients – because sometimes people have a hard time imagining something terrible happening to themselves. I don’t mind sharing my story – it has a good ending. I made some great changes – and I also was also able to climb that mountain with Michele!

I’m excited about my life and the future adventures coming, and excited about knowing that I have a strong plan to support me. Think about your plan, and make those changes you’ve been thinking about. It’s one of the best steps you could take (and then consider travelling to Africa and hiking Mt Kilimanjaro – it’s incredible! “Go Climb a Mountain: – my buddy said. Click here to get this on your bucketlist.

Just my thoughts for the day,

This is a timely conversation.  After a recent discussion with several young clients in the past couple of weeks, the topic of when not to use a Registered Retirement Savings Plan (RRSP) has been re-occurring.

At one recent example – a good client of ours brought her daughter in to sit with us, and produced a list of items she wished for us to talk about with her college aged daughter.  One of the items she wanted discussed was “investing in an RRSP”.  You can only imagine the surprised look on my client’s face when we reviewed that investing in an RRSP may not be the best idea at this time.

“You don’t want my daughter to save in an RRSP?” my client offered to me, “I always thought the best advice would be to start the RRSP right away?” she said.

This is such a very common conversation, and I can see why.  The belief that the RRSP is the best and only way to save is so ingrained in our belief structure, it almost feels wrong not to listen to it.

There are some times and situations when we should be looking at other alternatives to the RRSP.  This doesn’t mean that we shouldn’t be saving, it just means there may be a better place to save (often a Tax Free Savings Account (TFSA)) depending on the person’s situation in life.

Here are some situations that we should potentially not save in an RRSP:

• Low salary, and / or beginning a career: One of the easiest conditions to catch, is the person with a low salary, and / or beginning a career. If they are currently being paid a below average salary and in one of the lowest tax brackets, it may not be the best choice for them to be placing deposits into their RRSP.  Often the immediate disadvantage here will be the loss of the potential tax credit for that year (if depositing elsewhere).  The best move may be a deposit to a TFSA in that year, and then ultimately a transfer of the TFSA to an RRSP at a later time (and presumably in a year that they are earning more).  A transfer of the TFSA to an RRSP at age 30 (at an average salary) instead of age 20 (at a below average salary), may result in thousands of dollars more in the hands of the saver.  The RRSP works the best when the money is deposited at a higher income tax bracket, and removed in a lower income tax bracket.  If this isn’t going to be the case – you may wish to consider your strategy.
• Above average pension, and RRSP already starting to grow sizably: Again with the perception that the RRSP is the only way to save we often come across many people who in addition to their above average sized pension, continue to contribute to RRSPs with as much zeal as possible. RRSP savings may work well for these clients in earlier years – when they are just growing their accounts, but as the account sizes begin to take on six figures – they should start doing some planning on how and when they will get that registered money out.  The RRSP income will come out taxable, and care should be taken on how this will look in addition to their pension amounts.
• Next year you will be paid significantly more. If this is the case – then you may wish delaying your RRSP deposit until next year. By doing so, you will be entitled to a much larger tax break.
• You are a brand new business owner. New business owners may often experience some early successes, and start bringing in some sizeable savings deposits wanting to invest it in their RRSP. Some issues that they may not be predicting on their short to mid-term time horizon may be; the purchase of new equipment, hiring of new staff, low earning business years, and the need for immediate liquidity.  As RRSP income is taxable, it can be a discouraging experience to deposit $20,000 one year, to only receive $12,000 of it back in your hands when you need it the most.  It may be best for the budding owner to defer their RRSP deposit, and deposit their savings in a TFSA. TFSA income would be non-taxable.
• You are carrying high interest debt. In the event that one is carrying high interest debt on credit cards, or other high interest debt – they may wish to consider paying down these debts before investing. Often someone is particularly eager to save any new money in an RRSP when they opportunity presents itself, but the reality may be that the money may be best spent paying down the debt they hold.  If you are paying 18% high interest debt rates – it makes more sense to pay that back, than earn 6% in the RRSP.

These are all common situations, and I find that simply talking about these with clients, often helps unravel some of the questions that we have when utilizing RRSPs.  Through good discussion comes clarity.  RRSP investing is a terrific solution for many people.  The design, features and implementing of an RRSP is usually an attractive solution which allows many to receive a timely cheque in the mail in the spring.  Not understanding when you shouldn’t be investing in an RRSP sometimes isn’t as clear, and really needs to be discussed more often.