My RRSP and TFSA (Or the Parable of the Twins)

There’s a popular story told by banks and financial authors to encourage people to start saving for retirement at an early age. It’s called the Parable of the Twins and it goes something like this:

One twin puts aside $3,000 every year into his tax free savings account starting at age 22, and stops at 32 – never adding another penny to the account. His sister starts saving $3,000 annually at age 32, and continues until 62. Who has the larger nest egg?

Related: How much of your income should you save?

You know how this story goes by now. Assuming an annual return of eight percent, the twin brother wins hands-down. He ends up with $437,320 in his TFSA, compared to his sister’s $339,850, even though he contributed $60,000 less than his sister.

It’s a ubiquitous tale, but one that resonated with me at a young age. I was drawn to the awesome power of compounding – how money grows exponentially over time.

Funny enough, here I am, about to turn 36, and I’ve got roughly $120,000 saved in my RRSP with no intention of adding big dollars to this portfolio in the future. Now it’s time for me to let compounding do its thing. On the other hand, I’ve got nothing saved inside my TFSA and feel like I’m falling behind – especially with the recent increase to TFSA contribution limits.

Brother twin – My RRSP

I built up a lot of RRSP contribution room early in my career, and I’ve spent the last few years catching up. For example, I put $26,000 into my RRSP in 2013 and added another $10,000 last year.

My 2015 deduction limit is about $9,000 and each year due to a hefty pension adjustment I generate about $3,000 worth of contribution room.

So what will that mean for my RRSP? I’ve already put the portfolio on cruise control by switching to a broadly diversified two-fund solution (VCN – Vanguard’s Canada All Cap ETF, and VXC – Vanguard’s All-World ex Canada ETF).

Related: How my behavioural biases kept me from becoming an indexer

I expect an annual return of eight percent before inflation. In twenty years, assuming annual contributions of $3,000, the portfolio will grow to about $700,000.

Once I max out my RRSP contribution room, I’ll start pouring money into my tax free savings account.

Sister twin – My TFSA

Like the sister twin, I’m getting a late start on my TFSA. Unlike the sister twin, I’ll build a bigger portfolio by boosting my savings rate over time. Assuming annual contributions of $10,000, my TFSA account should be worth roughly $460,000 in twenty years.

Age 55 is an ideal target for early retirement goals. My strategy is to build up three buckets of income to draw from in retirement and then figure out the most efficient use of each. That could mean melting down my RRSP from age 55-65 and stashing away some of those withdrawals into my TFSA.

While the RRSP melts down, the TFSA continues to build up. From 55-65, assuming the $10,000 annual contributions continue, my TFSA could be worth over $1,000,000.

The retirement puzzle

The final piece to consider is when to retire. As I mentioned, a juicy defined benefit pension could also be on the horizon. So how does that fit into the puzzle? I haven’t figured that part out yet, I’m afraid. It’s a long way off, and a lot can change along the road to retirement.

Related: The battle between your present and future self

I do know that by harnessing the power of compounding, my brother twin portfolio (RRSP) will continue to grow, and by ramping up my savings rate for the next twenty years, my sister twin portfolio (TFSA) will thrive, giving me plenty of options for retirement.

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  1. Michael James on June 5, 2015 at 7:07 am

    I’m of two minds about such parables. On one hand they encourage saving, which is good. On the other hand, their talk of dollar amounts 40 years apart without accounting for inflation is absurd.

    Using a rough historical average of 3% inflation, 40 years erodes purchasing power by about a factor of 3.26. So the twins end up $104,000 and $134,000 worth of today’s purchasing power when they are 62. Neither is looking at much of a retirement without other savings. But at age 22, it’s unlikely they could contribute much more than $3000 per year. The assumption of level contributions for decades ignores both inflation and the tendency for an individual’s salary to grow faster than inflation due to increased experience.

    Since I was 23, my salary has increased at an average pace of 7.6% per year. Using the 8% return assumption, my old contributions are just barely able to keep up with my ever-increasing new contributions. My salary increases may be larger than typical, but the effect is still very important for others. Early contributions get the most growth, but later contributions partially compensate by being larger.

    Even your projected million-dollar TFSA will not seem so impressive when you reach age 65. Based on 3% inflation, it will be worth about $420,000.

    • Echo on June 5, 2015 at 7:23 am

      Hi Michael, do you think the level contributions in these calculators is just a crude but simple way to show the math without getting into major assumptions about inflation and salary increases over time? I agree that it’s problematic to assume that $3000 in today’s dollars will be worth as much as $3000 in the future.

      I like the way Talbot Stevens explains it when he says, “pay yourself first, and inflate.” That way, instead of level contributions, you increase that amount every year by the percentage of your salary increase, or at least the rate of inflation.

      BTW – I’d argue that your salary growth is an extreme anomaly in today’s environment where wage freezes and small cost of living adjustments are replacing the 4-7% automatic increases of the past.

      • Michael James on June 5, 2015 at 7:38 am

        Every model is able to answer some questions correctly but answers others incorrectly. For example, if the question is “should young people save?,” then this simple model gives the correct answer of “yes.” But if you ask “can I save for only 10 years when I’m young and then never save again?,” this model says yes, but the real answer is no because of inflation and rising real salaries.

        I agree that my salary increases have been unusual, but even for salary increases of inflation or inflation+1%, later contributions will be larger making up part of the missed growth that earlier contributions enjoyed.

        The truth is that it is best for most of us to save whenever we can, young or old.

  2. Jordan on June 5, 2015 at 7:55 am


    Both you and are in the same boat. As we have the same profession, I am currently working on the max allocation for RRSP’s, TFSA’s, and non registered for efficient tax purposes at the end.

    With a defined pension, you and I need to worry more about taxes then having enough money. Maybe we will compare notes as to the best strategy to accomplish this?

    Great post!


    • Echo on June 6, 2015 at 7:59 am

      Hi Jordan, the defined benefit pension is great, but the biggest unknown for me is whether I’ll stay with my current employer long enough to reap the full benefit of the plan (another 20 years).

      I think the best strategy is to continue to save outside my plan and keep my options open, rather than feel trapped with the so-called golden handcuffs.

  3. Stephen @ on June 5, 2015 at 12:22 pm

    I’m with you in that I haven’t figured out exactly what I’m going to do with my money in retirement or even how much I will need exactly. Life changes so swiftly that I think the major thing is focusing on saving and spreading those savings around so you can create a tax efficient situation in retirement (hopefully tax law won’t change that much!).

    For the next while I will be all about TFSA contributions and only contribute to an RRSP if there is an employer matching component or I have a high income year and want to reduce taxes in that year.

    Best of luck figuring it all out! What are your plans after early retirement?

    • Echo on June 6, 2015 at 8:13 am

      Hi Stephen, right now I’m just focused on improving our financial position every year, whether that be through RRSP contributions, paying down our HELOC, making RESP contributions, and eventually adding to our TFSAs.

      On top of that, I’m looking for ways to improve my side income – finishing up the CFP courses online and growing my fee-only planning business, finding new freelance opportunities, and building up my blogs. Those are the areas that I’m passionate about, and so when I start thinking about leaving my career or about what to do in “early” retirement, I’m sure I’ll continue to follow that passion in some form.

  4. Sean Cooper, Financial Journalist on June 5, 2015 at 7:09 pm

    Good post. Even though I have a defined benefit pension plan, who’s to say my company will keep it until retirement. For that reason I continue to max out my RRSP every year. With my mortgage paid off this year, I plan to catch up on my $30,000 of TFSA room.

    • Echo on June 6, 2015 at 8:15 am

      Hi Sean, paying off your mortgage this year is a huge accomplishment and once that’s done you’ll really be able to ramp up your savings. Well done!

  5. Robert on June 6, 2015 at 10:57 am

    Triplets if you are self-employed. The corporation may beat the RRSP for several features, especially flexibility. Doing it over I might have just TFSA and corporate accounts as the twins.

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