Did you know RRSPs violate a major investing rule?
Warren Buffett says its an investors best friend.
Albert Einstein says its the 8th wonder of the world.
What is it? Its compound interest.
In saying RRSPs violate compound interest, I’m not saying RRSPs are bad. You just need to know some of the aspects of RRSPs that many do not consider.
So how does a 40-year CFP (Certified Financial Planner) licensed investment representative veteran make this statement? Well its impossible to share the entire story in mt YouTube Short video (link at bottom).
For those who are not sure what compound interest is, its like a penny doubling every day. If you took a single penny and doubled it every day, by day 30, you would have $5,368,709.12. However, it’s important to note that it’s all about the power of doubling – if you asked the same question, but changed the doubling time to just 27 days, you would only have $671,088.64. Interrupt the compounding by withdrawing means forgoing all the interest that money would have earned had you not.
So how do RRSPs violate compound interest?
First, RRSPs violate compound interest because the only way to use the money is to redeem it. Redemption interrupts compound interest. Interrupted compound interest is opportunity cost lost – what the RRSP would have grown to if funds were not redeemed from it.
Secondly, RRSPs miss out on compound interest when they are invested in the stock market, as most are. Why? Stock market returns are not compound interest. Advocates of the stock market will tell you reinvestment of dividends is compound interest. True compound interest is built on the premise previous gains are locked-in which daily stock market returns are not. More on this later.
So what led me to make this bold statement?
Three years ago, I did some research to determine how well my client’s (an Ontario dentist) real life 34-year-old dividend-paying whole life insurance policy cash value growth did compared to the S&P/TSX Total Return Composite Index growth. What I found surprised me – after fees and taxes his policy growth was virtually the same. Many other real life examples show the same.
How could this be true? The answer is the power of compound interest.
This led me to wonder:
If you can get the same returns with no risk, why wouldn’t you?
I then researched the risk-adjusted return of life insurance vs TSX. Since life insurance has no risk it is not an investment. Therefore, its risk-adjusted returns are infinite times better than TSX.
This led me to ponder:
Why would anyone invest in something that didn’t have a very good risk-adjusted return?
These are pertinent questions for clients that I don’t think they’re considering.
As a CFP, armed with this research, I have a duty to putting clients’ interests first and share what I professionally view as best practices along with RRSPs and other investment options.
FACTS on RRSPs:
Many are aware that contributions into a RRSP are tax deductible when your income is high, that your money grows without tax (when your income is high), and you pay tax when you tax it out at an assumed lower tax bracket when you’re not working (when your income is lower). On the surface it sounds like a good thing.
But let me share some of additional information you may not be aware of.
- RRSPs are a tax-infected asset – worst kind you can have in my professional opinion.
- You assume all the risk – capital, fees, returns – the tax man assumes none but in the end shares in the profits
- You can pay up to 23x more tax than the tax you saved. Contact me and I’ll show you the numbers.
- Your money in jail unless you want to pay a penalty (tax) to get it out to use it before retirement.
- RRSPs are a single use asset designed for retirement – yes you can use it for your first home – however when you redeem money you interrupt compound interest which means opportunity cost lost – what that money would have grown to had you not touched it
- Since most invest their RRSPs in the “unsound money” stock market:
- poor risk-adjusted returns, inconsistent rate of return, not safe, no guarantees, market volatility, no control, not easy to manage, high fees.
- not compound interest – Warren Buffett is wrong in saying that dividend reinvestment is the same as compound interest. Yes, dividend reinvestment buys more shares/units – but more of anything that declines in value is not compound interest – the NAV (net asset value) declines on average 46% of the time every year – that is not compound interest – anyone who thinks otherwise needs to rethink their thinking. A fellow CFP Kyle Christensen shares the same. https://www.linkedin.com/in/kyle-christensen-45788b3b/
I make reference in my video (link below) to something called Wealth Creator. Due to time constraints my video did not go into detail what the Wealth Creator is. It should come as no surprise based on the results of my client’s life insurance policy growth that the Wealth Creator reference is to a specially designed dividend-paying life insurance policy. It is not the same as your grandparents life insurance that focused on minimizing premium and maximizing death benefit.
The life insurance used in the Wealth Creator is specially designed to maximize premium (savings) which fuels faster accumulation of cash value. This cash can be accessed through a policy loan to partially or fully finance their wants reducing or eliminating dependence on the banks. Why a loan? Because redemptions interrupt compound interest. Why life insurance? Its the world’s best vehicle to implement a lifetime of uninterrupted compound interest.
As a result life insurance creates more wealth than RRSPs – because its compound interest is not interrupted at any time throughout their life.
FACTS on specially designed dividend-paying life insurance:
Many of the facts on the internet on life insurance are incorrect. Let’s correct them – here are the attributes of specially designed high-yield dividend-paying life insurance. Its a kind of life insurance many have never seen before.
- High rate of return – higher than many think or wrongly communicate – todays policies are specially designed by a certified expert (Authorized IBC®️ Practitioner®️) to maximize cash value growth in ways a licensed life insurance agent was never trained to do
- Tax-exempt growth
- Tax-free access when structured properly by a certified expert.
- Tax-free on death
- Multiple use asset – your money is not in jail – personal, investment opportunities, retirement income.
- Best risk-adjusted return in the world – message me if you think there is something better
- Consistent Rate of Return
- Conservative (Safe) – the worlds safest storehouse of wealth
- Sound money – money that does not lose value
- No Market Volatility – locked-in gains – insurance companies absorb the market volatility, not you
- Easily & Quickly Transferable on Death – distribution by beneficiary is always best (avoids probate – some clients have had to wait over a year for other assets to be transferred)
- Easy to Manage
- No Hidden Fees or Penalties
- Lower Fees
- Preferred Creditor Protection
- Guaranteed Borrowing with no invasive credit check
What’s unique about the above list? These are all the things research shows people want. RRSPs provide very few of them.
That prompted another key question:
Why do people invest in things that do not give them all the things they want?
So, yes, in my professional opinion, RRSPs are not the best way to save for retirement. Is it for you? It depends.
If specially designed high-yield dividend-paying life insurance was the only way to save for retirement and for the other things you need and want, it would do the job very well. It is so all-encompassing that no other financial vehicle or strategy is needed to achieve desired financial results.
Some may be thinking I’ve lost my marbles with these statements. I can assure you I have not. There is no way I make statements like these without doing sound research.
Yes, this is different than what is considered current best practices. Just because its what many people do does not mean its best. We are all guilty of accepting things as true even though they are not. Its my professional opinion RRSPs are not the best way to save for retirement – it simply is not true.
Life insurance is not a new thing. Our grandparents used it as their primary means to save for everything. Then came the promises that the stock market would provide better returns. Well, I’ve proven it does not.
The supporting evidence for life insurance is strong – stronger than support for RRSPs.
This said, its not an either or decision. Life insurance and RRSPs can co-exist.
According to Arthur Schopenhauer, all truth passes through three stages. First its ridiculed. Second, it is violently opposed. Lastly, it is accepted as self-evident.
It is my hope this will accepted quickly so more and more people will find more freedom in their lives, and sooner rather than later.
The wealthy have done this for years – Rockefellers, Ray Kroc, Walt Disney, Jim Pattison, Ted Rogers, US Presidents including Joe Biden.
More and more doctors, dentists, professionals, business owners, white-collar, blue-collar are doing this.
So what do you do if you have RRSPs? I’m not saying you need to get rid of them. However, if you do, its as simple as reallocating them into life insurance. I can show you how.
As I wrap, ask yourself
Do you want to work with an advisor who does what’s popular or one who thinks outside-the-box?
I continually look for better sound money solutions. As mentioned, life insurance or RRSPs is not an either or decision. For those who wish diversify with RRSPs and stock market investments we are well equipped to assist with a Whole Picture Plan approach.
For those who are tired of doing the same thing and continually waiting for better results that don’t show up, let me encourage you to be open to rethink your thinking and do your own research. Then connect with us for a refreshingly different conversation.
Thanks for those who shared their opinion on my video. My videos and articles are based on 40-years of experience and are intended to help people find sound money financial freedom. Feel free to share opinions in a respectful way.
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If you’re an advisor or an accountant and want to partner on a case to see if this may be a good fit for your client don’t hesitate to connect with me.