In Money and happiness, our journalist Nicolas Bérubé offers his thoughts on enrichment every Sunday. His texts are sent as a newsletter the next day.
Posted at 1:32 a.m.
Updated at 8:00 a.m.
Warning: reading this section could arouse intense emotions. A co-worker said she made him feel “crummy”. It’s not far from what it causes in me too.
In short, proceed at your own risk.
Now that that’s said, let me tell you the story of the couple with 14 million RRSPs.
Last month, I received a message from a reader who I will call Michel. He explained to me that many people around him did not believe in the virtues of the registered retirement savings plan (RRSP).
“For them, the RRSP is a scam, because you pay tax one day,” he writes. We don’t talk about our finances with our family and friends, so as not to arouse envy and malicious comments. But we have more than $14,700,000 in our RRSP accounts that continues to grow tax-free. »
I thought it was a typo. There is no typo.
Michel sent me his statements. I spent an hour on the phone with him. Everything matches, down to the dollar.
How does a couple end up having more than 14 million in RRSPs? Did Michel and his wife win the lottery? Did they receive a mega-inheritance? Slipped on a wet floor at Walmart? Did they sell their company to Microsoft?
I would like to tell you that this is the case. But no.
They have only applied to the letter the ideas that I share here with a touching (or worrying, it depends) regularity: they have spent less than their income. They invested in diversified investments. They ignored economic forecasters. And they let time do its work.
“We didn’t do anything extraordinary,” says Michel.
Concretely, he and his wife, who were self-employed without an employer pension plan, contributed the maximum to their RRSPs each year from 1987 to 2010.
“In 1987, we could make a maximum annual contribution of $7,500 each. These amounts gradually increased, reaching $22,000 each in 2010.”
Each spouse therefore invested $15,650 in pre-tax income per year on average for 23 years in the RRSP. This gives an average of $43 in invested income per person per day.
From 2010, Michel and his wife no longer invested a penny: they retired. Since then, the couple has lived by spending their investments outside of RRSPs.
In 2010, their RRSP accounts totaled $3,025,000. Fourteen years later, with no additional contributions, their accounts show a value of $14,700,000.
How is it possible ?
This is the magic of compound interest.
RBC Wealth Management has long looked after the couple’s investments. But, since 2010, Michel has managed them himself.
Michel has invested in Apple, Berkshire Hathaway, Google, Walmart, Amazon, Meta, Royal Bank, Power Corporation and Toronto Dominion, among others.
Its portfolio contains several of the most important companies in the S&P 500, the index that brings together the 500 largest companies in the United States. With some large Canadian companies to round out.
Michel has obtained an average return of approximately 12% per year on his investments since 2010.
And 12% per year for 14 years increases 3 million to more than 14 million.
Growth may seem unreal. But the annualized compound return of the S&P 500 during this period was 14% per year, including the reinvestment of dividends. And, as an independent investor in a brokerage account with his bank, Michel pays no management fees – every percentage point earned by his investments goes to him.
In Quebec, we don’t think in the long term. As soon as an investment doubles, people say: “Sell it!” People do not understand that money can double, triple, quadruple, quintuple… The more money grows, the more quickly it grows. It’s like a snowball.
Michael
The 59-year-old investor says he is indifferent to the stock market falls, which (temporarily) slashed the value of his portfolio by half in 2008, then by a third at the start of 2020.
“In an RRSP, why worry about falls? It’s not money to pay for groceries tomorrow: it’s money for much later. The best thing is to be patient,” he says.
The idea of investing in his RRSPs came from his father-in-law.
“My wife’s father told us: “Always invest as much as you can in RRSPs.” That’s what we did. It’s accessible to many people: if we had put in half the money, we would have 7 million instead of 14. Or 3.5 million if we had put in a quarter. But it’s the same principle. »
Maximizing the RRSP didn’t stop him from living. “We have traveled, we have a comfortable house. But I preferred to drive my Honda Accord in excellent condition instead of buying a $70,000 Acura. That $70,000 is worth $2 million today. »
The majority of Quebecers are not interested in investments, notes Michel, who learned by reading different books over the years.
“People sometimes have $10,000 or $20,000 to invest, but don’t know how to do it. It would be simple, but that’s not the point. People will spend 50 hours reading before buying a $50 baby on Amazon. But very few will spend 50 hours learning how to invest money. »
Today, Michel and his wife lead their ideal life. They play a lot of sports and spend part of the year in the sun.
Does Michel have any regrets? ” No. But if I were starting over today, I would buy index exchange-traded funds (ETFs). It’s easy to follow and the management fees are practically zero. »
What advice would he like to give to people starting their careers today?
Invest from the first paycheck. For a couple, live on one salary and invest the other. In 15 years, your job will be optional. Your investments will generate more money than you.
Michael
The most impressive thing about Michel and his wife’s investment story is that it’s only just beginning.
Their RRSPs could be worth 30 million when they have to convert them to a registered retirement income fund (RRIF) at age 71, in a little over a decade, if we estimate a conservative return of 6% per year from now on. there.
“That means that we will have to disburse 1.6 million from the RRIF the first year, according to the mandatory minimum disbursement. Then the amounts increase. »
From the age of 80, 3 million per year will have to be disbursed.
Michel’s wife has trouble seeing how this is possible.
“It’s almost beyond comprehension,” he said.
Not easy to read that, right?
You were warned.
That said, don’t be too dazzled by these amounts. Michel and his wife invested more money than average. They have a higher risk tolerance, pay fewer fees, and have better investing behavior than almost everyone else. And their dollars have been working for them in the markets for almost 40 years – it’s normal to see high amounts. In fact, the opposite would have been surprising.
The important thing is to get started.
Read the text “How to invest in the stock market when you don’t know anything about it”
What is the RRSP?
The registered retirement savings plan (RRSP) allows you to avoid taxes, save and invest up to 18% of your gross annual salary, up to a maximum of $31,560 for the year 2024. Unused contribution room is cumulative. The tax is paid when the amounts are withdrawn. After age 71, the RRSP must be transferred to a registered retirement income fund (RRIF), and minimum disbursements must take place each year.
