August 22, 2024

Episode 319 - The Ultimate RRSP vs. TFSA Showdown

August 22, 2024

Which account should you choose, a registered retirement savings plan (RRSP) or a Tax-free savings account (TFSA)? This is one of the most common decisions that Canadians must make when it comes to investing, but it will also elicit some of the most passionate responses. RRSPs especially get a lot of undue skepticism, with some even labelling it as a scam. Today we take a deep dive into both of these savings accounts, exploring the downsides and benefits of each, and how to decide which account is right for you based on your savings goals. With the help of Conquest Planning, a specialized, in-depth modelling tool, we look at a range of scenarios incorporating different variables, like income and family size, and break down our analysis regarding the RRSP vs. TFSA decision for each scenario. We discuss key factors to consider, including the basic personal amount tax credit, which allows RRSPs to act as a tax flow-through, and the guaranteed income supplement (GIS), which can impact retirement planning. Our conversation also examines how to approach family size and longevity, as RRSPs become more advantageous with longer lifespans. Join us today to learn about the benefits and flexibility of each of these accounts, the surprising ways RRSPs often outperform TFSAs, and find out which one is right for you!

Key Points From This Episode:

(0:00:20) An introduction to the RRSP vs. TFSA debate.

(0:08:11) How we used the Conquest Planning tool and the scenarios we analyzed.

(0:10:34) Taxation and contribution considerations and strategies for RRSPs and TFSAs.

(0:20:11) An analysis of scenario one; $60,000 income and no children.

(0:22:38) Basic personal amount tax credit; how it allows RRSPs to act as a tax flow-through.

(0:27:20) The Guaranteed Income Supplement (GIS) and its impact on RRSP vs. TFSA analysis in different scenarios.

(0:36:16) How GIS is tied to Old Age Security (OAS) payments.

(0:41:12) An analysis of scenario two; a couple with two children, and the impact of the Canada Child Benefit on RRSP vs. TFSA contributions.

(0:45:21) The impact of mortality and longevity on RRSP and TFSA in various scenarios.

(0:47:01) Main takeaways from today’s scenarios and the advice our hosts would give to different clients regarding TFSAs and RRSPs.

(0:50:50) Why RRSPs are of greater benefit if you live longer compared to TFSAs.

(0:52:13) Our aftershow section: listener feedback, what Ben is working on regarding renting versus buying, the zombie apocalypse, and more.

Read the Transcript

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from three Canadians. We are hosted by me, Benjamin Felix and Cameron Passmore, Portfolio Managers at PWL Capital and Mark McGrath, Associate Portfolio Manager at PWL Capital.

Cameron Passmore: Welcome to episode 319. Welcome back, guys. This week, Mark, you're really carrying the load this week with a big topic. Maybe you want to give a quick intro?

Mark McGrath: Sure. Yes. I've been wanting to look at this for a while. I started digging really deep into the RRSP versus TFSA debate. The reason I think it's really interesting is it's probably the most common decision that I would say most Canadians have to make when it comes to investing money, like which account should they be using in RRSP versus TFSA?

A lot of people have very strong preconceived notions about which account is better, sometimes even universally, we'll choose a TFSA regardless. I'm a huge fan of RRSPs. Don't get me wrong. I love TFSAs as well. I think they're fantastic, but I think RRSPs get a lot of undue hate. So, I wanted to dig deep and run through some analysis using a financial planning tool that we have called Conquest Planning, which is a very in-depth modelling tool.

Cameron Passmore: Hates a strong word, isn't it? But there really is a visceral reaction about RRSPs.

Mark McGrath: People will literally say it's a scam. It's not even close to a scam. It's very transparent and you know exactly what you're getting. It's just people don't understand and people really focus on the taxation of the income coming out of the RRSP and they focus on that with tunnel vision to the point that they completely neglect all of the other benefits that come with it. I think the benefits are substantial and I think the analysis that I've done is very interesting, to say the least.

Ben Felix: It's interesting to think about because people contribute to their RRSP when they're working and withdraw when they're retired, but there could be pretty significant time gaps between when they're making big withdrawals and when they made the contributions. So, you can see how people might not think about how much tax they saved and they just see how much they're paying. And in nominal dollar terms, you probably do pay more in tax, but that's not what matters, as you'll talk about, but you can see it. You can see why people would feel that visceral reaction about it because they see the large dollar amount of tax bills that they're paying when they're retired or the withholding tax when they withdraw or whatever.

Cameron Passmore: Yes. They have the gross amount of the RRSP on their balance sheet all the way through the years, as opposed to thinking about it and after-tax dollars on their balance sheet.

Mark McGrath: Yes, that's a good point. It's the same with things like CPP, right? People complain about CPP during their contributory years saying, “I wish I could invest the money.” But if you ever met somebody receiving CPP payments that said, “Man, I don't like my CPP.” No, of course, retirees love their CPP. It's great.

Ben Felix: Yes. That's going to be a great topic. I'm looking forward to it. I did want to mention, someone reached out to me directly recently asking about becoming a PWL client. As a side note, this is what I want to talk about. But I don’t deal with clients directly so I introduce them to somebody in our team. Our team is something I'm very proud of. I think we have best team of financial planners in the country, and I think we could back that up. I'm not afraid to say it.

Anyway, what was interesting about this person is that they've reached out, they said that they've been thinking about getting in touch for a while, but they wanted to listen to the entire back catalogue of Rational Reminder episodes before reaching out. I thought that was incredible, but they said that they wanted to be as informed as possible before getting in touch.

I just thought it was interesting. I thought it was incredible. They did that. I always think it's incredible when people tell us that they've done that.

But I thought it was interesting because it goes to show that even someone who's that motivated and that informed can still see value in delegating their investment management and financial planning.

Mark McGrath: Didn't we talk about that on a recent episode in the data that you found on when people select financial advisors, right? If I recall correctly, you said that the research showed that people have higher levels of financial literacy tend to hire financial advisors more frequently, right?

Ben Felix: You're right. Yes, not necessarily surprising. I guess this person fits with those data.

Cameron Passmore: But that's probably 500 hours of preparation.

Ben Felix: Before getting in touch, it's like, “Man, it's honestly impressive. They probably will be a better client to work with for the financial planner at PWL that works with them.

Cameron Passmore: I'll feel good about the decision too.

Ben Felix: For sure. Something Mark Soth and I talked about at some point in Money Scope,

about how someone listening to Money Scope is making that big commitment, and they're learning all this nuanced information. But that's useful for someone, even if they are going to hire an advisor because it makes a client able to know what questions to ask and gives them some intuition on when they should maybe think something's not right. Being informed is smart for any consumer, but getting that email from someone who had just finished listening to the whole back catalogue before reaching out, I thought was really interesting.

Cameron Passmore: Speaking of our team, Ben, two of our advisors, Brady Plunkett and Lukas Fleck are hosting a webinar on Tuesday the 27th, and it's targeting helping dentists. It's actually called Flossing for your Finances, Personal Financial Strategies for Dentists, which I think we all agree it's a pretty catchy title. So, they're going to be covering things like, do I incorporate? How do income split with my family? Optimal way to pay myself, which is always such a hot question. How do I treat debt in my long-term strategy? Should I set up a holding company? To your original point, Mark, where should I save? RRSPs, TFSAs, corporations, IPPs? What is the best way to invest?

So, those guys do a great job in these webinars. If you can't make it on the 27th, they will be on YouTube afterwards. They're really interactive and then I think we're going to have people from the team in the chat to answer questions live. It's a great environment to get questions out there and to learn as much as you can.

Mark McGrath: Yes, it's great. I think Brady will be a great host. I believe Brady works with quite a few dentists, if I'm not mistaken. So, he's got a lot of experience specifically in this realm. I think it's going to be a very good webinar.

Ben Felix: They do a really good job with the webinars. I feel antiquated when I see the way these guys do the presentations.

Cameron Passmore: And they both bring the energy too, right? They come in pretty hot. So, it's good. They do a great job. It's not just a dull presentation for 45 minutes or something. It’s highly interactive. Okay, guys, we should get to the episode. Let's go.

***

Mark McGrath: RRSPs versus TFSAs. I'm calling this the ultimate showdown. I don't think it's the ultimate showdown because as I started doing this, I realized there's literally infinite different variables that you can tweak and infinite scenarios that you could look at when trying to make a decision on RRSP versus TFSA.

Ben Felix: You sent me the number of scenarios that it would be if you looked at everything. You multiplied a couple numbers to get – it was some ridiculous number.

Mark McGrath: If I looked at the things that I originally wanted to look at, and since I sent you that message, I've thought of another few scenarios, which would make it even crazier. But it would have been 72 different scenarios that I would have had to look at because what I originally wanted to look at was finding the break-even on RRSP versus TFSA contributions holding a bunch of things constant. The reason I was looking at this is because, again, I'm a huge fan of RRSPs. I think they're a lot more powerful than people give them credit for. If you look at common wisdom or rules of thumb online or even I hear it from advisors, I hear it on online forums like personal finance subreddit.

Generally, what you'll hear is that $60,000 to $70,000 of income is where the RRSP starts to take over the TFSA in terms of where your contribution should be put in terms of the priority, right? So, RRSP wins if your income is over 60,000 to 70,000. TFSA wins if your income is below that. I've even heard one very well-known influencer say that it's like 120,000 is the break-even. Not sure where that came from.

I wanted to take a look at it. And the reason that I've always thought that's not necessarily the case is when you look at taxes on the way out. So, in retirement, when you have an RRSP and you're pulling taxes out, you often have opportunities for things like income splitting with the spouse because RRIF payments and RRSP becomes a RRIF registered income fund eventually, in most cases. That qualifies for the pension income splitting. You also get a pension income tax credit, which isn't huge, but it's depending on your province, $400 to $450 in some cases of tax saving every year.

As I've argued before, and I'll get into this, RRSP returns, the investment returns are also tax-free if you hold things constant, and if you think about it the right way. I get a lot of flack for this, even from other advisors, but I'm doubling down on it and I'm going to get into that a minute.

Cameron Passmore: This is what you really think about, eh? This just rolls around in your head.

Mark McGrath: I spent so much time writing the book, and there's some other ideas for things I don't want to take a look at later, but this thing, because we have access to Conquest Planning, and because Conquest Planning is so detailed and so in-depth, I think I realize that, okay, Conquest is the way to do this. Because if you Google RRSP versus TFSA, you're going to find some really great analysis out there. But a lot of it is just done in, say, Excel. A lot of it is really not much better than napkin math because it's very difficult to quantify the value of certain tax deductions and tax credits over long periods of time, especially when you account for things like inflation and income splitting, the basic personal amount, which is an amount that all Canadians can earn before they end up paying taxes and need to inflate that at certain levels.

So, really, the way to look at this is, okay, let's take a real scenario where we can use some pretty advanced software to project it and it's not a black box. We can go and look at every single year of tax returns if we want in a tool like Conquest to really look under the hood and see what's going on. So, it's going to account for things that a lot of, I think the research out there doesn't account for already.

Ben Felix: I just want to say real quick that some of the stuff that we've had to build internally to answer questions like do IPPs make sense for people with corporations? It's the exact same thing, where you need to have a comprehensive model to do anything like that. And Conquest has that. To your point, Mark, they've done such a detailed job in their tax model and their government benefits model. It's incredible to have a tool like that to test different scenarios.

Cameron Passmore: Just too complicated too, back of the envelope.

Mark McGrath: You can't. There's so much going on that to do that all yourself, you may as well build something like a tool like Conquest. There's so much work that goes into it that cells are just not going to cut it.

That's what I was thinking about. I originally wanted to test a few scenarios. I wanted to test $60,000 of income for somebody as like my starting point because that again is fairly common wisdom. Take a look at that and then compare that scenario with an RRSP and a TFSA, then do $100,000 of income, then do $150,000 of income. Obviously, I would think that the RRSP would just continuously get better and better.

Then I wanted to look at a scenario with a spousal RRSP. So, a case where we have one spouse earning $100,000, let's say, and then the other spouse earning zero and then bring their income up over time and test a spousal RRSP scenario, which is an income-splitting tool and see what that looked like. So, I started doing this with the $60,000 income for a mock client that I created in Conquest's planning software and it looked really good. Sixty-thousand dollars is the RRSP won versus the TFSA. It won by such a large margin that I was quite confused.

So, I'll get into why that is and how that all happened. But before I do that, I want to explain why I set the scenarios up the way I set them up. So, I've made the argument, Ben, you've made the argument. Other smart tax people have made the argument that you cannot compare the same dollar contribution to an RRSP versus a TFSA. If you are, for the sake of the example, in a 50% tax bracket, and you have $10,000 to contribute to one of the two accounts, you can't compare just contributing $10,000 to an RRSP versus $10,000 to a TFSA. The reason is that the TFSA is a post-tax contribution. You earned your income, you paid 50% in taxes, you were left with $10,000 after tax, you contributed to the TFSA, and you'll never pay tax again on that income.

With the RRSP, you need to earn $20,000, pay 50% tax to get the $10,000. But if you're making a contribution to the RRSP, then it is a pre-tax contribution. You have to gross that up to think about an equivalent contribution to the TFSA.

Ben Felix: It's something that's pretty hard to think about. The way that I found to be easiest to think about it is instead of thinking about the after-tax amount first, which is intuitive because people receive after-tax dollars from their salary, like your income taxes are withheld that source for most people. But I found the easiest way to think about it, for me at least, is to just think about the pre-tax amount as the starting amount.

So, instead of the $10,000 after tax, you start with $20,000 before tax. The only time that this is actually practically true is if someone has a corporation and pays himself out a bonus and doesn't withhold any tax, then it actually works that way. In most cases, it doesn't. Although in some cases, you can have an RRSP contribution off of payroll from your employer without having any taxes withheld. I do that for my own contribution.

But anyway, think about the pre-tax amount first, and then the post-tax amount is what goes into the TFSA. So, in your example, you have $20,000 of pre-tax income. The same thing you said, it's just a different order. You start a $20,000 of pre-tax income. That can go directly in the RRSP. But if you want to put it into your TFSA, you have to pay the 50% tax rate. So, you've got $10,000.

Mark McGrath: That's exactly it. If you do that comparison, then the RRSP is tax-free in the same way that the TFSA is, right? You've got 20,000 starting in the RRSP versus 10,000 starting in the TFSA. If they both earn the same rate of return and you pay 50% tax on the RRSP when you withdraw it, versus no tax on the TFSA when you withdraw it. You end up with the exact same figure after tax.

Cameron Passmore: That makes many heads explode.

Ben Felix: Oh, that blows people with mine.

Cameron Passmore: That there, that could be the key takeaway from this whole conversation.

Mark McGrath: They are the same if you hold tax rates constant and returns constant. It's easy to hold returns constant.

Cameron Passmore: And portfolio constant.

Mark McGrath: Yes, exactly. Yes. If you have the exact same portfolio earning the same returns. I think there are valid arguments that, yes, tax rates are going to change. But the thing is, it's very likely that your tax rate will be lower, in my opinion, in retirement than it is during your contributing years. A, because you have no more employment income, you're not working anymore. So, you're starting with a lower base amount of income. And B, because of things like the pension tax credit, the age credit, income splitting availability. So, the argument then usually jumps to what if the government increases marginal tax rates? It's like, sure, they might.

But Ben, you've talked about this in episodes and we talked to Professor Kevin Milligan a couple weeks ago and like tax rates haven't really changed all that much over the past few decades for most Canadians, like the marginal rates. They've introduced new tax brackets. But the probability of your tax is going from 50% to 70% the marginal rate, I think is pretty low, but there's uncertainty there, no doubt.

Ben Felix: If you look back far enough, there's been some pretty drastic tax changes, particularly for high earners. But yes, in recent history, it's been fairly stable. Although, I guess, with the recent capital gains tax changes, that could be seen as a big jump in tax rates, depending on the type of income that people are earning.

Mark McGrath: Yes, fair enough.

Ben Felix: I just want to jump in for one sec. If you hold the tax rate constant, you use the 50% example, the RRSP and the TFSA give you the exact same outcome. But again, to think back to the episode of Professor Kevin Milligan, he talked about how measuring income tax is really hard because you can't just look at your personal tax rate. You have to look at government transfers and benefits and stuff like that, which is what you're talking about, Mark. So, it can get really complicated, which again is why we need something like Conquest to say, what is your tax rate at contribution and what is your tax rate at withdrawal. You can look at the tax rates, but it's an incomplete picture. You have to account for all the stuff that you've accounted for in your modelling.

Mark McGrath: So, here's the other thing, and I haven't fully bought into this theory yet. I think I've got a middle ground that'll work, but I've heard some people I respect say that you contribute to an RRSP at your marginal tax rate, right? So, you get a deduction off the top of your income and whatever your tax refund is, is based on your marginal tax rate, the top tax rate. But when you withdraw from an RRSP, your tax rate, your average tax rate, not your marginal tax rate.

The thinking here, and I can see you already cringing about this, Ben. But let me explain the thinking at least. In retirement, if you have multiple sources of income like CPP, Old Age Security, a defined benefit and an RRSP, why are you selecting the RRSP in that stack is the one that sits on top of the other income? Why aren't you looking at the RRSP income first as the income that taxed at the lowest bracket and then your CPP is taxed next and then your OAS and then your defined benefit plan? Again, I'm not fully bought into this. You're cringing hard. I can see that.

Ben Felix: But why wouldn't you make the same exact argument for that contribution? Why is the RRSP the last?

Mark McGrath: Because that's how the deduction works, right? I mean, you're deducting it from your income, which is being taxed at the top bracket. If I make $200,000 and I make an RRSP deduction, I'm losing the top $20,000 in income for that deduction. So, I'm getting taxes back at the marginal rate on my tax refund the next year. But when I retire, you can make the argument that you should use the blended tax rate as the actual tax rate that you're withdrawing the RRSP from.

I think that is potentially true if we just consider the minimum withdrawals that you have to make from your RRIF because that is a fixed income. So, if you just think about the minimum withdrawals that you're required to make from a RRIF in retirement, that's fixed. CPP is fixed. OAS is fixed. Your defined benefit plan is fixed. Why are you selecting the minimum fixed income from the RRSP as the income that's taxed at the marginal rate? I could make that argument, but at the same time, you have a choice with your RRSPs. You have a choice to contribute to the RRSP, whereas you don't have a choice to contribute to CPP. You don't have a choice to contribute to your defined pension plan.

Ben Felix: Does it matter, though? Like, you've modelled this. You know where the benefit of the RRSP comes from. Is it that? That is not an argument.

Mark McGrath: No, it's not an argument for the case that I'm going to make, but it is really interesting because, again, I have heard some people that I respect that are much smarter than me that have made a fairly compelling argument that we should think about it that way. When they listen to this episode, I'm sure I'll have discussions with them about it because they'll tell me I'm wrong and that we should be using the average tax rate on RRSPs when you withdraw them.

Cameron Passmore: Can you imagine that some people think we're nerdy?

Mark McGrath: A little bit.

Ben Felix: You can just model it though, Mark. You can model it the way that you've done. If there's some big magical benefit from using the average tax rate retirement, you'll see it in your modelling.

Mark McGrath: It's just mental accounting.

Ben Felix: Yes, so it's not a real thing.

Mark McGrath: I don't think it's a mathematical phenomenon. I think it's maybe a psychological one, right?

Ben Felix: It makes people feel good. That's great. I love it. Awesome.

Mark McGrath: Fair enough. But going back to what you're saying, Ben, is when you earn income, you have taxes withheld. So, if you're earning employment income, you have taxes withheld in your paycheck. If you're earning even income from, say, dividends from your corporation, you're going to get put on installment payments, right? So, you are going to have taxes withheld its source in most cases. When I made this argument on Twitter about RRSP returns being tax-free. A friend of mine who's an advisor reached out and said, “Yes. I just don't buy it. People don't think that way.” Because at the end of the day, you're going to have $10,000 in your bank account, and it's those dollars that you're making the decision with.

Nobody's going to gross it up to $20,000 if they do the RRSP contribution. They're not going to go and borrow money. They don't have an extra $10,000 sitting around. They're going to either contribute $10,000 to the RRSP or $10,000 to the TFSA. I do agree with that. So, I think from a mental model’s perspective, it's still unfair to obviously compare 10,000 in each of the accounts, but in practice, that's how people are going to actually allocate their after-tax dollars.

But the interesting thing is when you make a $10,000 contribution to the RRSP, in most circumstances, you will get a tax refund. So, the way I set the scenario up is that in the scenario where you're contributing to the RRSP, you get a tax refund. Then you take that tax refund and you put that into the RRSP.

If we just think about the math on that. Let's say you have $10,000 to contribute and you're in the 50% tax bracket again. If you put $10,000 into the RRSP, the next year you're going to get a $5,000 tax refund. If you take that $5,000, put it into the RRSP. The following year three now, you're going to get a $2,500 tax refund on that $5,000 contribution. Put in the $2,500, you're going to get $1,250, then $625, et cetera.

Over time, you are actually grossing up your RRSP contribution from your starting point of $10,000, using the tax refunds and then the tax refunds on the tax refunds. Over about eight years, you end up contributing almost the full $20,000 that you should have in the first place to make this an equal comparison. So, the break-even, you'll never actually hit $20,000. It just approaches $20,000 because you're halving it every time in this example, but you're going to get to $19,990 or something like that in year 10. But by year 8, it's like $19,960 or something like that.

So, I think in practice, that is a more functional way to model out this scenario, right? We're not going to gross up the RRSP. We're just going to use the tax returns.

Ben Felix: Does that detract then from the RRSP performance because you're delay in investing the tax savings? Yes. I mean, there's a time value of money issue there. It takes you eight years now. The majority of that comes in the first two years, right? So, you put in 10, you get 5,000 and then 2,500. You're already most of the weight of 20,000. It's just the smaller incremental returns that probably have the bigger drag in terms of time, but less of an impact because you got most of the money back in the first few years.

But to your point, that's money that's sitting with the CRA essentially at 0% interest until you get that money back. So, there is a return drag, I'd say on that.

Ben Felix: So, the results then are going to understate the benefits of the RRSP relative to someone who made a true pre-tax contribution?

Mark McGrath: Yes. The other way to make the pre-tax contribution generally is going to be to borrow the money. Like an RRSP loan or something, there's going to be an interest cost to that. Because, again, people don't have a pre-tax amount of money in most cases to actually contribute. They have to wait for the tax return to make it a pre-tax amount.

Okay, so with that in mind, you've got scenario one where you're just contributing to an RRSP, but you're using the tax refunds to gross that up over time. Then scenario two is just using the TFSA. So again, I started at $60,000 of income, and I ran a scenario where they could only save – I did it for a couple, so there's two spouses. They're 25 years old in this example. They retire at 65 and they have $60,000 of employment income, no children. They're just going to work for the next 40 years. Each of them can only contribute $7,000 per year to one of the two plans. I chose $7,000 because that's the TFSA limit for this year. So, if you have $7,000 in your bank account, you can put seven in the RRSP, collect the tax refunds, put all that in the RRSP, or you can put $7,000 in the TFSA every year.

When I ran this at $60,000 of income, I delayed CPP for both of these clients. I delayed Old Age Security. Most of the time we do planning for clients. We take them out to age 95 as the mortality age, which yes, is longer than life expectancy, but it is also the recommended planning from FP Canada.

Ben Felix: Yes. It's the 25th percentile roughly of life expectancy, which is the best practices life expectancy to use.

Mark McGrath: So, I took both of these spouses out to age 95. Again, we delayed CPP and we delayed OAS because in practice that's usually or often the right answer, at least mathematically, and especially if you live to age 95. It's definitely the mathematically correct decision.

When I did this at $60,000 of income, the RRSP, the estate value of the RRSP scenario at age 95 was a million dollars higher than the estate value of the TFSA at age 95 in future dollars. Right now, we're inflating everything at two and a half percent per year in this example so we assume inflation is two and a half percent per year. We're talking about a million of future value. Avocados are going to cost like $98 per avocado in that future scenario. A million dollars isn't going to buy you anywhere near the same as it would buy you today, but it was still a fairly impressive number.

At first, I couldn't really figure out where the difference was coming from. I just thought I made a mistake somewhere, like a $60,000 of income. I was quite surprised that the delta between the RRSP and the TFSA was so huge. So, I couldn't really figure out. I shot a couple messages to some of my nerdy advisor friends. Our friend Aravind Sithamparapillai. Did I get that right, Ben?

Ben Felix: Yes, you got it.

Mark McGrath: Nice. Another friend of ours, can't remember his name, starts with a J.

Ben Felix: Jason Pereira.

Mark McGrath: Yes, that's it.

Cameron Passmore: Jordan Parsnip.

Mark McGrath: That's right. That's the guy. Anyway, so I ran it through with them really quick and they jumped on a Zoom call with me right away and we tried to figure it out. Aravind is a huge tax nerd. When he gets excited about planning, his brain just goes into like hyperdrive. Within 10 minutes, he's like, “No, I figured it out.”

So, what it was is I talked earlier about the basic personal amount, which everybody gets. It's basically a tax credit on the first $15,000 of income is essentially tax-free, in today's dollars. Today it's around 15 – I think it's exactly $15,000 of income that you earn is tax-free.

Time, if we index that $15,000 at two and a half percent per year. In this example that I was running, by the time this couple is 65 and ready for retirement, that bracket, the basic personal amount would grow to about $42,000 per person. So, that's $84,000 for a couple at age 65 that they could in theory earn without paying any taxes.

Again, in this example, I've delayed CPP and Old Age Security to age 70. So, there's this window here of age 65 to age 70, wherein the TFSA example, they have zero taxable income because they're withdrawing everything from a TFSA at age 65. Then CPP and OAS kicks in at age 70, so they have no taxable income from 65 to 70. But in the RRSP example, again, I'm dealing CPP in OAS, but they have only taxable income from age 65 to 70. Over that five-year period, that's $420,000 of RRSPs that can come out tax-free. That's really interesting because that creates a situation where the RRSP, at least on that amount, becomes a pure tax flow-through, zero tax.

So, you've got $420,000 of RRSP money that you put in and got your taxes back. It's pre-tax money, but you paid zero tax. The only other instances of that being available to Canadians is like the first home savings account. If you buy a qualifying home is a pure tax flow-through. The healthcare savings accounts for some small business owners and corporations up to certain limits can act that way. But there are very few opportunities to literally earn a dollar and keep a dollar.

Ben Felix: So, it's a straight tax arbitrage between your marginal rate when you made the contribution and 0 in 40 to 49 years from now.

Mark McGrath: Exactly. That chunk of the RRSP being coming out tax-free explained like three-quarters of the delta between the RRSP and the TFSA scenario, which is really interesting. Aravind pointed something out to me and I don't really know how you figure this out, but he instantly said, “Oh, in that case, the RRSP will always win even at the lower bracket.” He'll have to explain that to you because I don't know how he figured that out. I was like, “What's he talking about?”

So, I went back and I ran it at $48,000 of income instead of $60,000 of income. Because in BC, at least, $48,000 is basically the top of the first tax bracket. Even at $48,000, the RRSP was beating the TFSA. It largely came down to this basic personal amount tax credit. Essentially, with the TFSA, you can't avail yourself of any tax credits. The RRSP, you have a chance to reduce your marginal rates even further in retirement because of the tax credits you get. So, you get this kind of dual benefit from the RRSP in that sense.

Cameron Passmore: So, TFSA basically forces the high marginal rate when you made the contribution through your lifetime with no chance for any sort of tax recapture. The fact that's what's going on. Interesting.

Mark McGrath: Yes, exactly. So, like the way I was thinking about it is if you're going to delay CPP and Old Age Security, in the TFSA-only scenario, there's an additional cost to delaying CPP and Old Age Security. Because if you were to take it at 65, you'd be able to use up that basic personal amount, those tax brackets with the CPP and OAS income at 65. So, if you delay it to 70, the additional cost is that you're not going to be able to avail yourself of any of these tax credits. So, it becomes more expensive almost to delay OAS and CPP in a scenario where all you have is tax-free income otherwise.

Cameron Passmore: So, the RRS is a tax hedge.

Mark McGrath: Now, when I ran it at $48,000 of income per person, I didn't think it was fair to use $7,000 of savings each, just because that income at $48,000 is a starting salary for a lot of people. Being able to save $7,000 each per year is probably a relatively high amount for a lot of people. So, I dropped the contribution to $3,000 per spouse instead of seven. But again, the RRSP won in that scenario. So, Aravind was right in his intuition that they would even work at the lowest tax bracket. It wasn't by as wide of a margin as the original example with 60,000, but the RRSP did come out ahead.

Like I said, then I tried to, in the TFSA scenario, I said 65 is the age for the CPP and OAS to try to soak up some of those brackets, but it was actually worse than delaying CPP. So, they were able to avail themselves of that basic personal amount tax credit. But by taking CPP and OAS early or at age 65, they didn't get the benefit of the deferral, which increases those pensions for the rest of your life. So, at age 95, taking CPP and OAS was still the right decision, which then got me thinking about, what if they die young? What if they die at 80 and not 95? What would that look like? So, I started running these other scenarios with different longevities, and I'll get into some of the results of that as well.

At this point, I'm thinking, okay, the RRSP wins basically every time. Then, it occurred to me that at this point, Conquest Planning doesn't have the guaranteed income supplement built-in, which we call GIS. So, GIS, for those that aren't familiar with it, guaranteed income supplement. It's a government support payment for Canadian seniors age 65 or older. It's an income-tested benefit, and it's really designed to help very low-income Canadians. It's a tax-free benefit paid annually. Again, it's income tested, so there's a ceiling of income over which you don't qualify for the GIS at all, but it's also tied to your Old Age Security payment. So, you can't get the GIS unless you're also receiving Old Age Security.

The government of Canada has a really nice little calculator on their website where you can input your age today, your expected retirement income, you're expected taxable retirement income, and it will tell you what it thinks you will qualify for in terms of the guaranteed income supplement. Again, in the TFSA scenario, from 65 to 70, they have zero taxable income because they're not taking CPP or OAS. But by adding in GIS, using that calculator, figuring out what the present value of their GIS would be and then inflating that from 65 to 70, also taking Old Age Security at age 65. Because again, to get the GIS, you have to take the Old Age Security. That drastically changed things.

So, at age 65, you're getting Old Age Security in this example. You're getting the guaranteed income supplement, which works out to about $7,500 per year, tax-free for those five years, per spouse. We've got $15,000 of tax-free income coming in every year. That's based on the fact that we have spouses here. If you're a single person, the ceiling's different. If you're a couple, then it's a different ceiling. In the case of a couple, it was $15,000 of additional total household income for five years from 65 to 70. That drastically changed things.

In that scenario, the TFSA came out ahead, but not as much as I would have thought. In Conquest, we have something called a retirement score. And really what the retirement score is, is it takes the present value of your total after-tax cash flows in retirement, takes the present value of that, and just divides it by the total present value of your after-tax expenses in retirement. If you have a higher present value of income than expenses, you have a number over 100% for your retirement score. If it's below that, there's a shortfall somewhere in the plan, you're going to have less than 100%, right? Obviously, we want to shoot for more than 100%. That means we're fully funded for retirement according to the model.

In the RRSP scenario, death at age 95, $48,000 of income, saving $3,000 a year, the RRSP had a retirement score of 110%. So, they’re fully funded for retirement. That's using a linear rate of return. That assumes the returns are earned equally every single year with zero volatility. I should also point out, I used a 5.9% rate of return in all of these models, assuming an all-equity portfolio, 5.9%. It's not our expected returns. This is the expected returns that comes off the shelving in Conquest.

When I ran the TFSA scenario, it was 113%. So, the difference in retirement funding, even with the guaranteed income supplement, it was only like an absolute difference of 3%. So, I wanted to look at some other metrics. So, I wanted to look at what's the projected value of the estate, what's left over, net of taxes, net of probate fees, net of everything. What's the check that's going to the inheritors of this estate, using this model. With the RRSP at age 95, the future value of the estate was $1.17 million. With the TFSA, it was $1.76 million. That's future value, so quite a significant difference. In present value terms, it's about $100,000 difference. So in present value terms, we're talking about a $200,000 estate for the RRSP, and a $300,000 estate for the TFSA, 50% increase more or less, which is, okay, that's significant. But again, that uses linear returns.

If we Monte Carlo this, meaning, if we'd say, "Okay, this couple of retires a thousand times, and they get a different return and a different order of returns in the retirement. It's not like a GIC, where you're going to get 5.9% per year. We know the order of returns matters, and we know there's volatility on risky assets. So, you're not going to get 5.91%. What if we retire a thousand times? How many times that we run out of money in each scenario, the RRSP versus the TFSA.

What was really interesting is, the RSP actually came ahead in that scenario, because it has to do with the old-age security, which I'll explain in a second. But the RRSP, the Monte Carlo pass rate at age 95, 59.4% of the time, they still had money left at age 95. So, out of a thousand simulations, 594 times, they still had money left. They had not run out of money. With the TFSA and the guaranteed income supplement, it was 60.7. So, it was barely higher. Again, that is with the guaranteed income supplement. Without the guaranteed income supplement, the TFSA scenario drops down to 54.6%, so significantly worse than the RRSP scenario.

So, there just wasn't a huge difference. Even when you account for guaranteed income supplement.

Ben Felix: You said OAS was the explanation for that. What does that mean?

Mark McGrath: Oh, yes. So, the reason that I think the scenario, even with the guaranteed income supplement wasn't light years ahead, is because, you're then forced to take Old Age Security earlier than you wanted to, or earlier than would have been optimal. So, you're not getting the benefit of the Old Age Security deferral, because you're taking it 65 instead of 70. So, the lifetime income that you get out of Old Age Security in order to get the guaranteed income supplement, you're getting less OAS over time in order to get the tax-free income from the guaranteed income supplement.

Ben Felix: I think so. I'm just wondering if, because when you run a Monte Carlo simulation, bad outcomes should be less bad for the RRSP than the TFSA, I think, because you'll pay less tax. Your pre-tax savings account should offer some amount of hedge against bad investment outcomes.

Mark McGrath: Because the government owns part of the RRSP and they're paying some of the –

Ben Felix: Effectively, yes. If you lose in your RRSP, you're reducing your future tax bill also. For the TFSA, you've already prepaid, right?

Mark McGrath: Yes, makes sense.

Ben Felix: I think Scott Cederburg talks about that in his paper. We talked with him about that. The first time he was on Rational Reminder, about his paper on pre- versus post-tax savings optimization.

Cameron Passmore: Just reduces the future tax liability, not the tax liability in the year that the cash is needed, because I assume you had a spending amount you needed in this plan. So, if there's a shortfall, I had to take up more RRSP to make up that shortfall. No, no. It would have been fixed dollar because you had a gap. It just means you had less RRSP at the end of that year, therefore reducing future tax liability.

Ben Felix: I think that's what it is. I think that if you just compare pre- and post-tax savings, I think the pre tax account is going to give you some amount of protection against bad investment outcomes.

Mark McGrath: That's good point, though, Cameron. I did use a $6,000 after tax retirement target for this analysis, because if you take two people earning $48,000 per year, back out taxes and CPP contributions, and then back out $3,000 of savings each. What's left is about $72,000 after tax. So, that's their current lifestyle, is about $6,000 a month. So, I use that as the retirement target as well.

Cameron Passmore: So, the gap, it was being used by the RRSP to be filled. That tax liability in that year is the same. But to Ben's point, if you're selling more units to make that payment, there's less RRSP later if when the market's rebound, thus reducing the future tax liability, because your RRSP is going to be smaller.

Ben Felix: So here's what, in that Cederburg paper, it's the David Brown, Scott Cederburg, Michael O'Doherty paper, tax uncertainty and retirement savings diversification, classic. It is a good paper. It's in the Journal of Financial Economics. Traditional accounts, which in their case is – what are they called? IRA accounts, not the Roth, the traditional IRA. Traditional accounts are valuable for hedging retirement account performance and managing current year income near tax bracket cutoffs. Whereas, Roth or TFSA, in our case, accounts allow investors to mitigate uncertainty over future tax schedules. Somewhat related to the stuff you're talking about.

Mark McGrath: I'm sure that plays into it. That's harder to – I think, tease out of cash flow model.

Ben Felix: But it should show up in the Monte Carlo, though.

Mark McGrath: Yes. The Monte Carlo just gives me the score in the actual range. It's not that I can look into every year of the Monte Carlo and see what's happening. I can just see the pass, fail rate for that year. But one of the other really interesting stats that this particular Monte Carlo shows is, in years where you ran out of money, what was the largest shortfall in any given year? So, when you did run out of money, how much were you short? The RRSP comes out ahead here, and I think this is related to the Old Age Security as well. Because if we look at the RRSP scenario, again, the Monte Carlo pass rate was 59.4%. The largest shortfall in any given year was $31,000. So, there was $31,000 short for their goal of $72,000 per year in income. That was the worst-case scenario with the RRSP.

With the TFSA, even with the guaranteed income supplement, the worst shortfall was $59,900, so nearly double. I think the reason there is that, again, because of the Old Age Security being deferred to age 70, your minimum baseline income from 70 to 95 is that much higher. So, your worst-case scenario isn't as bad, because you've got more Old Age Security income coming in, and that's fixed, and it's also inflation-adjusted. Whereas, with the guaranteed income supplement scenario, you're taking the Old Age Security at age 65, so your minimum income floor is lower for the rest of retirement. So, in the cases where you did run out of money, you had a bigger shortfall between your fixed income and what your goal spending target was.

Ben Felix: Can you reiterate why there's a difference in timing when you're taking OAS in the two scenarios?

Mark McGrath: Yes. So, in the case where you have guaranteed income supplement, it's tied to taking Old Age Security. You cannot receive the guaranteed income supplement unless you are already taking the OAS benefit payments. So, if you delay Old Age Security to age 70, you can't receive the guaranteed income supplement.

Ben Felix: Because it boosts your income too much.

Mark McGrath: No, because it's tied to the Old Age Security. The qualification for a guaranteed income supplement, first qualification is you were receiving Old Age Security payments. That's it. In fact, Old Age Security Income is not used when testing your income level for the guaranteed income supplement. So, that income ceiling.

Ben Felix: Okay. So, you won't receive it for those five years if you delay.

Mark McGrath: That's what I'm saying, yes. You won't receive any guaranteed income supplement if you delay. You won't get the GIS later, because now CPP comes in and CPP is too high for you to qualify for the GIS.

Ben Felix: Oh. So, you take it early so you can get the GIS for those five years.

Mark McGrath: Exactly what I'm saying, yes. But you defer the CPP. So CPP income is used to see if you qualify for the GIS. In terms of the income ceiling, CPP income qualifies. In this case, I used 66% of the maximum CPP, because their income is $48,000. That's about 66% of the, what we call the YMPE, which is their CPP contribution ceiling. So, in this scenario, by delaying CPP, and only having a TFSA, they would, in theory, qualify for the guaranteed income supplement. The only way to get the guaranteed income supplement is to apply for Old Age Security. An Old Age Security Income is not used in the test as to whether you have too much income for the guaranteed income supplement.

Ben Felix: Crystal clear now. You've basically modeled smart financial planning into the comparison.

Mark McGrath: Yes. Now, I think, and this is a question of morality, but there are planners out there who plan for their wealthy clients to try to qualify for the guaranteed income supplement for those five years. I think that's pretty gross, to be honest. That's my personal opinion. I don't think the guaranteed income supplement is designed for wealthy people who just aren't paying any tax to get some tax-free income from the government, but I know planners who intentionally try to design things so they have zero income between age 65 and age 70, so that they get the guaranteed income supplement.

On that point, I would not be surprised if the guaranteed income supplement somehow became TFSA tested in the future. So, the government knows the value of our TFSAs. They get a transaction report, but they also get a report that shows the market value of people's TFSAs. As TFSAs get bigger over time, and again, this is pure speculation on my part. CRA has not come out and said anything about this, as far as I know. But I would not be surprised if people with mid-six and seven-figure TFSAs who are trying to qualify for GIS, CRA just goes with your TFSA balance. Oh, it's over X, you're absolutely not qualifying for the guaranteed income supplement for low-income seniors. I'm sorry. Pure speculation, but especially, I'm 40 now, 25 years from now, do I think the GIS will be there when TFSAs are in the seven figures?

Ben Felix: Be there for you. It'll be there for people with low incomes.

Mark McGrath: It'll be there for people with low incomes, for sure.

Ben Felix: And small TFSAs.

Mark McGrath: There'll be some threshold, I think, under which maybe you can qualify, but I wouldn't be surprised, because it's just not a far leap. They already have the value of your TFSA, and they can just look at your guaranteed income supplement application and say, "Do you qualify based on your TFSA balance?"

Cameron Passmore: Ben, you and I talked about that on an episode a long time ago. We had a client that had that exact experience accidentally, and they were getting the GIS and they were stunned, because they have rather large RSPs. Their comment was, "Yes, this is gross."

Mark McGrath: Yes. Like Old Age Security has a pretty high-income test. It's around, I think, like $90,000 now. But GIS is really designed for people who are low poverty level incomes. Great program, but it's certainly not designed for people trying to game the system with a TFSA to get it, right? Without the GIS, if you believe what I just said in that, okay, maybe GIS is not going to be there for me. Now, I still have to make the decision of a TFSA versus an RRSP.

In the scenario where there's no guaranteed income supplement at age 95, the estate value, the future value of the estate with the TFSA was 659,000, and the retirement score was 105%. Again, with the RRSP scenario, the retirement score was 110%, and the estate value was 1.17 million. So, nearly double the estate value. So, the GIS really was the entire difference maker between the RRSP and the TFSA in that scenario, which kind of leads you to think, "Okay." Even at $48,000 of income, then, your decision as to whether to contribute to a TFSA or an RRSP largely comes down to your belief as to whether the GIS will be there for people with large TFSAs later.

Cameron Passmore: Didn't see that coming.

Mark McGrath: No.

Ben Felix: You can't do it on the back of a napkin. A little too complicated.

Mark McGrath: Yes, for sure. Again, I tested things like moving CPP and OAS around to see if we can improve the situation. But the best scenario for both cases, TFSA and RRSP is deferring CPP and Old Age Security. And only with GIS that I have to pull the Old Age Security back to age 65, which actually detracted from the OAS income, but at least give you the guaranteed income supplement.

So then, that got me thinking as well about, what if you have kids? The reason this, I think, is interesting, is because if you have kids, you qualify for the childcare benefit. This is an income tested benefit as well, and it's based on the number of kids you have, and it's based on your income. But I said, okay, if we contribute to RSPs, we're lowering our income, and we would qualify for more childcare benefits that way. So, what if we ran a scenario, still at $48,000, still saving $3,000 a year to one of these accounts, but we added two children. How would that impact things?

When we got the childcare benefit, when we received that payment, we saved that money as well, instead of spending it.

Ben Felix: The Canada child benefit?

Mark McGrath: Yes. Sorry, yes. It can be pretty significant. So, I ran a scenario where they had two kids at the parents ages of 30 and 32. They start at age 25, but at 30, and then age 32, they have two kids. Again, their income is $48,000. It goes up by inflation. Years and years, they get the Canada child benefit. In some years, it was as high as $12,000 of benefits that they were paid. So, it can be quite a significant amount. I set up this scenario so that in the TFSA scenario, as much as possible would go to fill up their TFSAs, if there's still room available. If there was no room available, because they'd maxed it out, the excess would go into a non-registered taxable account. Then, I did the same with the RRSPs. So, if you're contributing to the RRSP, you get the Canada child benefit, that goes into their RRSPs, up to their RRSP room based on their previous year's income. Any excess goes to a non-registered account.

I wanted to see what difference that would make, because in the RRSP scenario, you would get more Canada child benefit because you're lowering your income even further with your SP contribution. And because the Canada child benefit is income tested, your income is lower. You get more of it.

Ben Felix: It all comes back to your effective tax rate. This is another form of – it's a government benefit. But when you reduce your income, when you're eligible for this, you're not only reducing your taxes based on your tax bracket, you're also getting a boost in Canada child benefit. Which ends up being, I don't know what the numbers are, but a massive, in percentage terms, reduction in your tax rate.

Mark McGrath: Yes, it's huge. Like I said, in this case, there were years where they were getting $12,000 in Canada child benefit on a combined household income of 96. So, you're looking at a 15% benefit based on the income that you have. That was huge. So, this obviously pushed the retirement scores to astronomical numbers, because you just went from saving $3,000 a year to your RRSPs to saving $6,000 to $7,000 per person to your investment accounts every single year. It does improve the RRSP scenario.

The TFSA with the guaranteed income supplement, still wins out at age 95 in this case. So, with two kids, the RRSP retirement score was in excess of 150%. Unfortunately, Conquest just truncates it at 150%. It says, if your retirement score is over 150%, we're not even going to tell you what it is. It's just so high. I don't know if it's 692% or 151%, but it was above 150%. But if we look at the estate values, with two kids in the RRSP scenario, present value of the estate, so in today's dollars was $1.146 million. With the TFSA scenario, with two kids and the GIS, it was $1.166. So, it was a $20,000 difference in present value terms, which just isn't that huge. And again, that's using straight line returns.

If we Monte Carlo it the RRSP with two kids, the pass rate in the final year at age 95 was 81.9%. The TFSA with GIS was 79.4%. So, you actually had a higher probability of meeting your retirement goals with the RSP, versus the TFSA, and the guaranteed income supplement when two kids are involved, because of the additional amount I think that you could save to RRSPs. Without the GIS, that pass rate score dropped to 76.5% for the TFSA, and the estate value dropped to 5.68 million in the future value, which is 983,000 in present value. Without the GIS, the TFSA scenario was easily the worst of the scenarios that I ran.

Again, the shortfalls were bigger, anytime there's – across all the analysis that I did, any single time you had to take the guaranteed income supplement, the worst-case scenario was worse, because you have to take Old Age Security earlier. It is pretty wild. I won't go too far into the details on the other scenarios I ran, but I did test mortality at age 80, and then also age 105. Yes, I get it. The probability of living to 105 is pretty slim. But again, we're talking to 25-year-olds here. Who knows what the future look like, what our life expectancies are. But if you do live a long life, and we don't know in advance, what's better, the RRSP or the TFSA?

If you die at 80, the RRSP becomes generally worse because you have a larger embedded tax bill that's getting taxed at a higher marginal tax rate. So, you're dying with a larger RRSP balance if you die young.

Ben Felix: That's actually really interesting, yes.

Mark McGrath: Yes. So, with no kids, death at age 80, RRSP retirement score was 121%. Present value of the estate was 162,000. In the TFSA scenario with no kids and the guaranteed income supplement, it was – retirement score was well over 150%. Present value of the estate was 841,000 versus 162 for the RSP. So, multiple of nearly – Monte Carlo scores were far greater for the TFSA in that scenario, 90% versus 66%. But the largest shortfalls were still worse for the GIS scenarios there too.

What I came to at the end is the decision between the RRSP and the TFSA has probably less to do with your marginal tax rates today, and has more to do with your belief in whether the guaranteed income supplement will be there for people who have TFSAs only. How many kids you're going to have, and how effectively you can save any government benefits you get in terms of reduction in taxes or income from the government. Lastly, when you're going to die. Those three factors, it seems to me, are largely more important than what your income is.

Ben Felix: Wow.

Mark McGrath: Pretty interesting stuff.

Ben Felix: What's the main takeaway? How does this affect advice you give to a client, for example?

Mark McGrath: I mean, that's why we model every client scenario, their individual scenarios, because everybody's different, and we don't know a lot of the variables I'm discussing. Will GIS be there, and when are you going to die? If you tell me when you're going to die, I can design a perfect tax plan for you. But in the absence of that, we have to make some guesses. But we do a lot of scenario testing, right? So, we can see what the outcomes are.

We should also point out, the TFSA is an amazing account. It's super, super flexible. The tax certainty that you get with the TFSA, you already paid your taxes. You never have to worry about taxes again. With the RRSP, you don't know what your future tax rates are going to be, or what everyone's future tax rates are going to be. So, I think the trade off, even if the RRSP is mathematically better, the flexibility that's built into the TFSA is excellent.

I don't know that I have a rule of thumb, but I would say, even at lower incomes, like you probably want to look at or at least model using both accounts or splitting it half to the RRSP and half to the TFSA. It depends on your goals, like I'm talking about retirement money here. So, if you're going to buy a house next year, and that's what you need the money for. Of course, that's a totally different discussion. But if we're talking retirement money, I often make this decision, or encourage people to make decisions when there's that much uncertainty, and one outcome is definitely going to be better than the other, and we just have no idea. And you're choosing between two things, do both. Then, anchor to the one that worked out the best, so that psychologically you feel good. Even market timing, lump sum investing, that kind of stuff. Invest half now, and then invest half later, and then just anchor to whichever of those two pots did better. One of those scenarios, I think,

Ben Felix: Super interesting.

Mark McGrath: What do you think, Ben? What do you think investors should do with that?

Ben Felix: I think what you said makes a lot of sense. I think people in low tax brackets or middle tax brackets that are constrained in their ability to save. So, they can't just max out both accounts, which is probably ideal if you can. Having some mix is probably the right thing to do, whether it's 50:50, or some other amount. I know that's also in that Scott Cederburg paper that I mentioned earlier. I think people with low taxable incomes should just use a TFSA in their paper, and otherwise, they had a rule of thumb. I think it was age plus 20% go into a traditional account, and the rest goes into a Roth or a TFSA.

Totally different approach to what you're talking about, because they were modeling tax rate uncertainty based on historical US tax rates. But they come to a similar conclusion on having a mix of both account types for where you should be contributing. So, I think if there's one big takeaway from your analysis, and then to line that up with the Cederburg stuff, it's that maybe it doesn't make sense, in any case, for somebody to focus solely on one account, which is often online. You have a low income, you should only use this account. That may not always be true or correct.

Mark McGrath: Yes. Obviously, there's contribution limits to both the RRSPs and the TFSAs. But when you have a fixed amount to save, again, you're looking at a fixed amount that's in your bank account. You don't need to fill one before the other. You can split that deposit in whichever weighting you want to be funding both. So, it's not that you have to fund one, and then the other. It's not like some sequential order of events. You can simultaneously fund both of them in some different ways.

Cameron Passmore: I agree. A lot of people may not have the income to be able to afford to maximize both, but a lot of people do have the income and don't maximize both. The amount just becomes a nice beacon to strive for each year to keep everything maximized. For many people, it's not that out of reach. Yes, you'll have to make some spending choices to have the cash flow, but that's what this is, deferred gratification. Instead of spending it now, put it into one of these accounts, and I just find the amounts. They're just so nice, and clean, and strive to do it. If you do that, you're going to have a pretty good nest egg at the end of the day.

Ben Felix: Another takeaway might be that the differences weren't huge.

Mark McGrath: At 95, they were pretty small. At 95, it was largely a coin flip.

Ben Felix: So, someone's agonizing over which account to contribute to, and that's causing them not to save or to delay saving, because they've got some analysis paralysis. Maybe it doesn't matter that much. Just put it somewhere.

Mark McGrath: I didn't get into the details, but the death at age 105 scenarios, the RRSPs got substantially better than the TFSAs. So, the longer you live, the better the RRSP looks versus the TFSA. The other thing I should mention, I didn't mention this out of the gates is, in the RRSP scenario, if there's additional excess income that's above their spending needs in these scenarios, I'm funding the TFSA in retirement. So, like we've got this $6,000 retirement income goal after tax. But when you delay CPP, and you delay Old Age Security, and then you've got a relatively large rift balance, your fixed income in the scenarios I ran, the fixed income that they were bringing in after tax exceeded the $6,000 retirement target. So, they had excess cash.

So, this wasn't like trying to maximize their spending. This was with a fixed $6,000 a month spending throughout retirement when there was excess cash that did go into a TFSA. Just not at all while they were working and contributing. So, that was across all three scenarios, all age groups, and everything. But the death at age 105 scenario, the RRSPs became substantially better, basically in every single case. So, it seems to me, if you die young, the RRSP is worse. You have a bigger embedded tax bill. The longer you live, the more you get to spread that tax bill out, and the better the RRSPs become. So, from that perspective, the RRSP becomes a little bit of a little bit of a longevity hedge versus the TFSA only strategy.

Ben Felix: Whoa, that's wild. Makes sense, though, because you've got more years of low tax brackets to spread out that income. Really, interesting.

Cameron Passmore: Okay. Good to go to the after show.

Ben Felix: Let's go.

Cameron Passmore: Not a lot of stuff in there, but for three people sticking around, I got a nice note from someone on LinkedIn this week who said, "I just wanted to say, I've been a fan of the podcast since its first year. Thanks for putting out great content. There's not much of it online for this industry. I'm a new father, and when I'm taking my son out for a walk, and he's not being in the stroller, I always binge your content. When my friends ask me where to go to learn about investing and personal finance, I send them your way. Wishing you guys continued success. Sincerely, Joel in Norway."

Mark McGrath: Very nice.

Ben Felix: Nice.

Cameron Passmore: Pretty nice one.

Ben Felix: I can talk briefly about some stuff that I've been working on. I think I sent it to both of you guys. I won't give away the results yet, but I'll talk about what I've been doing. There's publicly available data on Canadian home price indexes for the country, in aggregate, a bunch of provinces, but not all of – it might have all of them, actually. No, not all of them. A bunch of cities. So, I've got that. There's also publicly available data on rents, survey-based rents. The survey data looks at vacant rents, but also occupied rents. Those are different, because rents for vacant departments will reflect market rents. Rents for occupied apartments will reflect some blend of market rents and old market rents, because people that have been in an apartment for a while would be paying, in many cases, below market rent.

Anyway, that's the data. I took those things. I don't know why I didn't do this sooner. But I took those data and reconfigured my rent versus buy model that usually just uses expected numbers, like expected returns, and expected inflation, and stuff like that. I reconfigured it to take historical data, and I started plugging numbers in for all those regions, all of Canada provinces, cities, and I'm not going to spoil the results. I'm also a little bit nervous about saying them, because I want to spend more time with them first. But mind-blowing stuff, I'll say that.

The results are just not what I expected at all. So, hopefully, next episode, maybe I'll be comfortable enough with that analysis to talk about it, but it's really, really surprising.

Cameron Passmore: Very cool.

Ben Felix: That's my recent content. That's what I've been consuming.

Cameron Passmore: So, what else is going on? Bachelorhood's almost done, Mark?

Mark McGrath: Yes. Family's back in eight days. I miss them a bit. I mean, I miss them a ton. Sorry, but it's been a bit good for me. I've been working out every single day. I've been eating super healthy, haven't had a beer in three weeks, been meditating, going to sleep at 9.30, waking up at 5.30 without an alarm clock. It seems like I'm setting a baseline, because I've got two young kids. Life is just chaos when you've got two young kids. So, I miss them, but it's been a really good opportunity to just get my own house in order, so to speak. So, I'm excited for them to come back and see if I can maintain the same schedule and activities, even though the house is crazier.

Cameron Passmore: I mean, Ben knows a thing or two about crazy households.

Ben Felix: Yes, my house is pretty crazy. All right, though. We've been spending a lot of time at the river over here.

Cameron Passmore: That's awesome.

Ben Felix: Sort of five-minute walk from the Gatineau River. Kids have taken to swimming. Last year, they were all been nervous around the water, but they've been in swimming lessons and stuff like that. Then, just spending a lot of time down at the river, they've all gotten pretty comfortable. Maybe not every day, because the weather's not always permitting. But a few days of the week, every week, we've been going down, swimming around. It's pretty fun.

Cameron Passmore: I hear the water's really warm this year. It's beautiful. In the mid-80s, I think.

Ben Felix: Yes. I have not stuck a thermometer in there, but it feels pretty good.

Cameron Passmore: I've heard people say that their lakes are warmer than they've ever seen them around here.

Ben Felix: I heard some people that were swimming in the river yelling about how it was colder than the lake. So, maybe the lakes were warmer than the river, I don't know, but it's comfortable enough.

Mark McGrath: Did I tell you guys that Disney filmed a movie in front of my house or a TV show? Cameron, did I tell you this?

Cameron Passmore: No, I saw your tweet on it.

Mark McGrath: I realized one morning that is absolutely the most purest form of passive income that I've ever received. Basically, some guy knocked on my door one day and it's just like, "Hey, we're part of this production company, and filming down the street from your house in a few weeks." Can we use your driveway to store some equipment? I was like, "Yes, but do you have a badge or something that proves that this is legit?" I don't know what to ask for. Some guys just knocking on my door asking if he can use the driveway. I was like, "Yes, sure." He's okay. "Well, what's your email? What's your phone number?" I'm kind of like, "I don't know. This could be some scam that I'm just not aware of." But just nice enough guys, so I give my number and send me over a contract. And yes, they offer to pay me 500 bucks, use my driveway for four days.

Yes, my family is away, so I don't really need to drive to go anywhere. I can go pre-shop all my groceries and stuff. I was like, yes, I could just stay in my house for four days or just go for walks if I need to get anything. I talked to a friend of mine. He's like, "Five hundred bucks for four days, that's way too low. You should get them up." I was like, "Okay." So, I started negotiating. I got them up to 1500 bucks for the four days.

Cameron Passmore: Come on, 500 for four days wasn't enough?

Mark McGrath: The way that our street works is they had all the trucks parked all down the street. I lived next to a forest, like similar to Ben, and they were filming in the forest. So, they needed our street to park all the trucks, and all the equipment, the generators, and everything like that. But the trail of trucks ended basically at my house, and so, I realized that if I try to negotiate too hard, they'll just say no, and they'll probably just go to my neighbor's house, and store the stuff in their driveway instead. So, I figured, at $1,500 I tripled the original offer and left it there.

Cameron Passmore: And they said yes.

Mark McGrath: They said yes. This guy knocked on my door a few days ago while they were still filming. It's just like, "Here's your check."

Cameron Passmore: Wow.

Mark McGrath: Pretty cool.

Cameron Passmore: That's pretty sweet.

Mark McGrath: They just packed up and left one night, like in the middle of the night. I woke up the next morning, everything was gone, the trucks, the trailers, the generators, the cables. It was an eerie experience.

Cameron Passmore: So, you mentioned generators. We decided today we're going to put a generator outside of our house and hook it up to the natural gas.

Mark McGrath: Just as a backup system or what?

Cameron Passmore: As a backup, because it was power on and off. We've had enough episodes of, we don't have our freezer jammed with stuff, but enough times where you lose everything. With the natural gas, we have the space. Apparently, it's super easy to put it in. So, we're doing it. Decided that this afternoon, it serves our big financial decision of the day. You have one right, Ben?

Ben Felix: Not a fancy one. I've got a pull start one that I have an extension cord that I can plug into my office.

Cameron Passmore: But it does the trick, right? Then, run around – enough to plug the fridge into or not enough?

Ben Felix: Yes, it is. But our fridge is a hassle to pull out, so we usually just plug the freezer in. Works well enough. We're going to get one like what you're talking about too. I don't know when we're going to do it, or at the very least a transfer. We lose power out here quite a bit too. It's never that bad, but it's happened enough. There's a thing called a transfer switch. So, I might just get one of those instead of the really fancy generator, because those are pretty pricey, but I don't know.

Mark McGrath: Interesting. You've mentally gone through the zombie apocalypse scenario, trying to figure out, okay, what do we do if we survived the zombie apocalypse? I'm just the least prepared person in the world for that, but my best friend is the most prepared person in the world for that. So, when he came over last time, he's, "What's your plan when that happens?" "My plans to take my whole family and go to your house, dude. Like, you've got all of the canned fish, you've got all the ammunition, you've got the generators, you've got the boat, you've got everything all set up for that. Like I don't need to recreate that in my house. I'm just coming over to your house when that happens."

Ben Felix: Yes. I don't have that much preparation. We have really good camping equipment, so whenever the power goes out, we still have a gas cooking stove that we can pull out and stuff like that. We've gotten pretty good at dealing with power outages here, but it would be just easier to have a generator.

Cameron Passmore: Okay. From RRSP versus TFSA to zombie apocalypse.

Mark McGrath: Important stuff.

Cameron Passmore: We covered it all. Okay, guys, that's a wrap. Thanks for listening.

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