In a recent Financial Post article, “Are RRSPs really work it? The answer may surprise you” linked below, the author gets into the math of compounding with pre and post tax investments. Its an interesting exercise to see how best to grow net worth and tax implications for your heirs.

The trouble with using an mathematical analysis for personal finance is that it ignores the fact that personal finance is 80% behaviour and only 20% math.

Canadians regard TFSAs differently from RRSPs. When funds to into an RRSP its treated as long-term savings for retirement. Its mentally put away as funds untouchable. TFSAs, however, are considered as savings, stored away until a new purchase is desired.

The idea of building an after tax retirement fund is appealing. Entering retirement with a significant balance in TFSAs, providing a significant tax-exempt income goes a long way to enjoying post-working years. It also allows the money saved in RRSPs to be withdrawn safely at lower tax rates.

Starting young in your 20s and 30s, dreaming of compound returns building a next egg into the 7 figures is fanciful. This strategy is best left as an after-thought for retirement planning. Reality is those funds will grow and compound only until you and your spouse look to buy a home for your growing family. Or maybe a new car. Or that vacation to Disney World. And if the TFSA had been your primary retirement savings, you’ve jeopardized those savings for mid-life purchases

Make your main retirement vehicle the RRSP. After all of your debts are paid off (save your mortgage) contribute 15% of your income to a low cost RRSP. That can be in a self-directed account where you can choose well diversified ETFs or to one of the robo-advisors like Wealth Simple or Quest Wealth who automatically allocate your contributions to pre-determined array of well diversified, low-cost ETFs.

Savings for big purchases can be done through the TFSA. Once you are completely debt-free, including your home mortgage, you can start using the TFSA for truly long term savings.

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