Monday, 11 February 2008
This book is written by Preet Banerjee, a financial advisor by day and a dedicated blogger at WhereDoesAllMyMoneyGo by night. The subject - Registered Retirement Savings Plans - is near and dear to all Canadians' hearts, especially at this time of year, when all the banks and mutual fund companies are exhorting everyone to invest for their retirement before the end of February, the deadline for contributions to apply to the 2007 tax year.
The book is thus a timely contribution and a very useful one at that. It is divided into three sections. The first section explains the basic rules about RRSPs and how they fit into the Canadian tax system. The second section is the guts of the content with a series of 41 chapters on a wide variety of topics involving RRSPs in one way or another, ranging from simple tips, rules subtleties to complicated investment strategies. Due to the nature of this content, it is not necessary to read the book from one end to the other. The strategies are stand-alone. The third section is a brief appendix with other sources of information, notably including blogs that Preet has found useful. It is flattering to find my own blog listed among those he finds to be useful - how could I disagree! His description of me as a "very detail oriented writer" is accurate and for me, at least, a compliment - I've found that paying close attention to details is necessary to avoid unpleasant 'gotchas'. This book is not an exhaustive, definitive guide and reference source. Its aim is to provide inventive ways of effectively using RRSPs.
Preet's writing style is informal and free-flowing, very readable and natural. He does a good job explaining terms and technical details, a real bonus for those just getting into RRSPs.
Preet's day job as an advisor shows through in the realism of the examples he chooses and the comments he makes. Key choices that most people must make are analyzed - e.g. pay down the mortgage or contribute to the RRSP, since most people don't earn enough to do both simultaneously. And he does the analysis with numbers, which is far more believable. He also comments on the psychological challenges that often prevent people from gaining the benefit of a strategy, such as the temptation to spend the tax refund from an RRSP contribution instead of investing it somehow or the panic that causes a sell-off at precisely the wrong time when using leverage.
The introduction of Monte Carlo simulation of investment returns in the analysis of various scenarios such as RRSP vs mortgage and RRSP vs non-registered account is a major improvement over traditional modeling, which usually assumes some constant rate of increase. Monte Carlo is vastly more realistic. It gives a much better sense of the risk involved in investing when returns swing amongst a range of positive and negative results from year to year. The fact that an 8% average growth rate with different patterns of positive and negative years can result in vastly different total wealth / retirement incomes will probably be a revelation to many. The book is well worth it for that analysis alone.
There could be a simplified presentation of the long analytical chapters 26, "RRSP vs Mortgage" and 28, "RRSP vs non-Registered Account". So far as I can tell, some factors and information are irrelevant to the conclusions, like the inflation rate, the value of the house and its rate of value gain and how long the investor lives. Though this extra data was likely added to present a believable scenario, it makes no difference to the choice of which is better to do. Another quibble is the conversion of the net savings/wealth to retirement income. We are never told specifically how that happens, though I assume again, if it is done consistently, it makes no difference. The possible confusion is that all the charts show wealth on the Y-axis not income. Some of the charts appear to show unsuccessful outcomes with higher net wealth than successful ones, a puzzle for sure. Could this just be a problem with graphics?
One part of the RRSP vs mortgage analysis that I question concerns the assumed contribution of the $2009 monthly mortgage payment to the RRSP in various scenarios after the mortgage is paid off. At $60k salary, the contribution limit is 18% times $60k or $10,800 yet the analysis posits contributions of 12x$2,009 or $24,108 per year plus an amount of $3,000 already being contributed that grows with salary. Since the investor's salary and contributions are assumed to grow at 4%, in 25 years here is what I calculate: salary $153,798, new RRSP limit $27,684, existing $3k contribution up to $7,690 plus $24,108 equals $31,798, or $4,114 too much. This especially affects scenarios B and D where the investor is assumed to pay off the mortgage early then contribute the mortgage payment amount to the RRSP. I wonder how the conclusion would differ taking that lower RRSP contribution room into account? Would scenario D still beat C?
At the end of the many pages on RRSP vs mortgage, the summary table on page 125 is the key. The basic answer is that when the rate of return of the RRSP exceeds the mortgage rate, the RRSP is better and vice versa. Moshe Milevsky had already shown and explained that in his book Money Logic so it's good that they arrive at the same conclusion. Beyond that, the relative certainty of the mortgage rate against the uncertain, variable investment return is a major consideration that Preet examines at length.
It is surprising to see that the book does not present a case or scenario in chapter 28 on the RRSP vs non-Registered account comparison that shows one of the core supposed benefits of the RRSP - namely, that when one gets deductions at a higher tax rate when working and a lower tax rate on withdrawal when retired, one is much better off saving in an RRSP. The scenario of Anna in the book appears to show that she ends up in the same tax bracket, though that is not explicitly stated. However, it is significant that the non-Registered account strategy only beats the RRSP when the on-going investment taxes of the non-Reg account are paid with other funds. Such an approach does not compare apples with apples, as Preet himself says on page 148.
There are several spots where the author says that a number of other factors could affect the conclusion (e.g. page 155 regarding the RRSP meltdown strategy) but he neglects to explain even the nature of the effects. That's frustrating for the reader.
I notice that some of the book's content seems also to be on the author's WhereDoesAllMyMoneyGo blogsite so interested readers can get a sense of the book for themselves there.
All in all, the book could be better but it still quite useful; it only takes one good idea to be worth the money.
My rating: 3.5 out of 5.
The book can be purchased at the RRSP Book website,
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