My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, March 14, 2011

The Kid in the Candy Store: Human Nature, RRSPs, Free Cash and the Holy Grail

Several weeks ago I read a column by Rob Carrick titled “Why TFSAs Trump RRSPs for the young and lower paid.”. The column was premised on a paper by Jamie Golombek of CIBC on why TFSAs beat RRSPs as a better retirement savings for some Canadians. This topic has subsequently been beaten to death, but in this blog I want to concentrate on the exchange I had with Jamie in regard to human nature and its impact on investing.

The Globe and Mail had an online discussion about the above article and I sent in the following comment: “The problem with technically correct solutions is that they ignore human nature. As a Chartered Accountant I can tell you people consider their RRSPs holy and try their best to never withdraw from them. A TFSA or any accessible account is like candy, you stare and stare and then indulge.”

Jamie responded "you may be surprised to learn that that 80% of all RRSP withdrawals are made by individuals under age 60, generally pre-retirement! Not much of a holy grail!" Jamie's paper also reports that recent data shows 1.9 million Canadians withdrew $9.3 billion from their RRSPs in 2008 and taken in conjunction with the 80% withdrawal statistic noted above, suggests RRSP funds are being used well before retirement age to supplement income.

Jamie clearly considered the human nature aspect of investing in his report (see Accessibility of Funds on page 5) and provides statistics to develop or support the thesis of his paper. I have no issue with his statistics or his assertion RRSPs are being used to supplement retirement income by those under the age of 60. I do object however, to his contention that RRSPs are not considered the Holy Grail.

In my practice, I have observed that RRSPs are the Holy Grail for most of my clients. More importantly, RRSPs seem to act like those invisible fences for dogs and form an invisible barrier to prevent my clients from "grabbing" at their RRSPs; although I think Jamie would suggest the barrier may have some holes in it based on his statistics.

I asked Rob Carrick his thoughts on the matter and he responded, "I'm stunned every time I read stats on how many people take money out of their RRSPs, never mind TFSAs. The harder it is to withdraw from a retirement savings vehicle, the better."

On the surface, it is difficult to refute Jamie's assertion without my own statistics. Numbers are numbers. But, if we could dig a little deeper the same numbers may tell a different story. Here is where human nature and its impact on investing come into play. Human nature, like physical nature, takes the path of least resistance. At the end of the day, my professional observation of human nature takes me down the same road as Rob: the greater the barrier, the better - even if some ignore the barrier. Anyway, I will leave this for the psychologists to study and will return to my laboratory, being my office, and provide some personal experiences on human nature and free cash.

RRSPs, The Holy Grail Or Just Full of Holes

In my accounting practice, it has been my experience based on discussions with my clients, that they withdraw RRSPs almost exclusively for financial need only and not for discretionary purposes. I will concede that my client’s incomes are well above the national average and thus they may not be a representative sample. If we could somehow ask each person who withdraws funds from their RRSP in Canada, “why are you doing such and what is the intended use of the funds?", I am convinced that the vast majority would answer we are taking out the funds due to financial need and not for discretionary purchases. Most people take a certain pride and comfort in their RRSP savings. There is a peculiar permanency in investing in an RRSP that is not nearly as tangible in a TFSA or other savings account. Non-RRSP savings accounts seem to represent “leftover money”. RRSPs represent security from old age impoverishment. That is the Holy Grail. Most people cash out RRSP’s only under financial duress. Financial duress is not the same as supplementing income.

So what about those alarmingly counter-intuitive statistics that would suggest we have become an unholy nation desecrating their RRSPs? It is highly probable in my humble opinion, that many Canadians are convinced that they have to contribute to a RRSP by the various advertisements they are bombarded with in January and February each year by financial institutions and at the urging of financial commentators and in fact, many were really not in a position to contribute to their RRSP in the first place, thus dooming their RRSP from inception and inflating the withdrawal statistics.

I See It, I Want It

Now, assuming we are not compelled to withdraw our savings (or perhaps more aptly borrowings), restricted savings accounts are like invisible fences, or the glass in front of the candy counter. Withdrawing cash from an accessible savings account like a TFSA is relatively easy. Especially when we see that cash as “leftover earnings”, or as a well-deserved reward for how much we’ve earned or how hard we’ve worked. If we move away from restricted accounts such as RRSPs, the invisible fence seems to turn off. Now the buying is easy. Self-restraint is hard. Accessible cash quickly winds its way along the path of least resistance and a cash register.

I often observe the sweet lure of accessible cash in the actions of many self-employed individuals and professionals in respect of their quarterly personal income tax installments. Some make significant sums of money, but you would not believe how many don't have the funds to make their quarterly income tax installments. This results in huge income tax liabilities around April 30th and installment interest and penalties for failure to make these required installments. Why don’t they have this cash you ask? In some cases they have not collected their accounts receivable or received allocations from their partnerships, but in many cases, they have spent the free cash that should have been allocated to their income tax installments on discretionary items only because it is was easily accessible and winking at them.

A hot topic that has been widely debated recently is whether it is better for small business owners to eschew salary and RRSPs in favour of leaving the funds in their holding company. Technically leaving the money in the corporation is correct (although I have some reservations with this strategy because you stop RRSP contributions, lose eligibility for CPP income in the future if no salary is taken, and potentially forgo the deductibility of child care expenses if no salary is taken) but in my opinion, the candy (ie: available cash) will prove too tempting for most people and some of those corporate funds will find their way to cover that vacation they wanted in Europe or that new car or boat they have their eye on; whereas if those funds were contributed to a RRSP, the invisible fence effect would come into play. I have observed this first hand with the typical current holding company structure where excess profits from a operating company are moved to the holding company; this new twist would only create more accessible cash to potentially be withdrawn.

Intuitively Rationally Irrational

Although not directly related to free cash, an example of personal behavior superseding fundamental financial common sense is in relation to income tax refunds. Individuals can file a form T1213 to obtain waivers to reduce income tax withholdings in certain circumstances, but almost no one does. Ignoring the administrative issue of obtaining the income tax withholding reduction, which may contribute in part, individuals just love their lump-sum tax refunds (usually as result of their RRSP contributions) and they intuitively know they would not save an amount equal to the same lump-sum income tax refund if they had their income tax withholding reduced on a bi-weekly or semi-monthly basis.

I have only anecdotal evidence to prove people consider their RRSPs the Holy Grail. But really, is it unreasonable to accept that TFSAs or other non registered accounts are merely shelves displaying the cash candy to which our sweet tooth cash cravings will inevitably succumb? The path of least resistance generally ends at the cash register in the candy store. The high road is easier to follow when the candy case is locked. A financial vehicle that people feel is “locked in” will help stymie our natural inclination to self-indulge and spend and will only be accessed under financial duress and not necessarily as a supplement to retirement income. Now that is a Holy Grail indeed.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.


  1. home value $525,000
    mtg component $280,000 mat Jan2014 (current rate 4.5%)
    secured LOC $48,000 (prime +1)

    rsp husband (33yrs old) $40,000
    rsp wife (31yrs old) $35,000

    net monthly income $7000

    Question/advice: would you withdraw all your rsp to pay off LOC and then use the LOC payment to rebuild rsp? currently allocating $1250/mth to LOC

    Love your blog!

  2. Hey Anon:

    Thanks for the kind words. I have to walk a fine line with this blog in providing specific advice. Even though you have provided personal details, I do not want to provide specific advice on this blog, since if we met in person I may find other details, issues and concerns to take into account that could change my answer.

    Thus, all I can say is rightly or wrongly, I believe what I wrote, RRSP’s are the Holy Grail or I would be a hypocrite and when I was your age, I tried to build up my RRSP to some extent and pay down my mortgage to another extent. I never considered collapsing my RRSP to pay down my mortgage. However, there are those who may disagree.

  3. Thank you for the prompt reply - there are other details and that is why we have financial planners I suppose. Again, I always look forward to your posts!

  4. Hey Mark

    I really like what you did here with a philosophical argument supporting RRSPs as the Holy Grail, very unusual depth for a blog.

    However, if I can offer some constructive criticism, you could have ended your argument two paragraphs earlier and not lost much. A bit to long.

  5. Hey Tony

    No problem, I accept the constructive criticism, you are not the first person to mention the length of my blogs to me. Before I started this blog, my exposure to financial writing was through financial columns in the Globe & Mail and National Post, I was not even aware of most of the blogs that exist. Thus, when I decided to start my blog, columns were my model for writing. I pre-wrote several blogs for tax season as I will be to busy and mentally tired to write, but once I run through those blogs I will be more conscious of keeping the blogs shorter or I will consider breaking the blog into parts.

    Although especially with tax, it is hard to explain a concept without greater detail so I still reserve the right to have greater depth and length, hopefully not at the cost of rambling on.

  6. Dear Mr. Bean,

    Feel free to ramble.
    When Golombek talks about 80% of withdrawals, is that in dollar amounts? Also, is there any correction for the HBP? I know I have taken out much more from my RRSP's at age 30 than my parents have.

  7. Hey Kevin

    Jamie’s statistics reflect 80% of the 1.9 million actual RRSP withdrawals, not the dollar amounts. Per Jamie’s, these are not his stats. they are from the CRA.

    Great question about the HBP, I had the exact same thought and asked that question of Jamie figuring that was the flaw in the statistics, but alas, he says both the HBP and LLP withdrawals are not included because they are not part of RRSP income line on the return.

    If you return to see my answer, I have a question for you? Why as a younger person did you withdraw money from your RRSP? Did you need it financially, did you use it for a trip or car or were you caught up in the Jan/Feb. vortex of advertisements and financial commentators making you think you had to make a RRSP contribution when you really did not have the funds?

  8. Sorry I wasn't clear enough...I've only ever taken money out through the HBP. I'm firmly of the mind that my RRSP's are sacred. I do, however, plan on using the TFSA as a shorter-term investment vehicle. Current car is paid for, but we're saving for the next one in the TFSA.

  9. ...80% of all RRSP withdrawals are made by individuals under age 60, generally pre-retirement...

    RRSPs converted to RIFs wouldn't be counted here, would they?

  10. Anon- RRIF's are not counted, since the stats. were based on RRSP taxable withdrawls, not non-taxable conversions. Also, since the mandatory conversion age for RRIFs is 71, very few people convert before that age as they attempt to maximize their tax deferred savings.

  11. There are sound reasons for early cashing of RRSP funds. I retired early and I did not touch our RRSP funds but we lived comfortably off non-RRSP equity funds with average capital gains. For 5 years we paid zero tax then the RRIF started and I'm paying 30+%. Too late I learned that I should have been shrinking the RRSP at 20% tax [about $15k/yr] and leaving some of the non-RRSP equity for low tax 'mad' money.

  12. Hi Anon

    You raise an excellent point. As a tax CA I always try and minimize income taxes, but minimization may also include paying income tax to achieve “income tax smoothing” and thus, as you suggest, you would have been better off cashing your RRSP early to utilize low marginal income tax rates prior to accessing your RRIF and the higher income tax rates you are now incurring.

    That being said, this blog was really meant to convey that RRSPs psychologically seem to act as a stronger barrier to access than non-registered accounts, but access should not be confused with astute income tax planning.

    Thanks for raising the issue.