The normal rules of thumb for asset allocation in Canada are as follows:
1. Registered before Unregistered
2. Foreign Stuff goes in RRSP
3. Domestic Equities are the best things to have Unregistered
4. If you expect to have a higher income in retirement than you do now, skip the RRSP (ie, you expect to be in a higher tax bracket) - the RRSP is all about deferring tax, so there is no point saving 20% now to pay 30% later.
So what a normal Canadian Couch Potato does is figure out an asset allocation, and go from there.
Retirement in Canada is, as you may know, pretty generous - OAS (Old Age Security) is the state-funded part, added to GIS (Guaranteed Income Supplement) for those with very low incomes; CPP (Canada Pension Plan) is for people who have worked and contributed to it (this is mandatory for the employed and self employed). If you've lived in Canada your whole life and get to retirement age, you're going to get $12k a year (today's money) no matter what.
Cruises? Fancy cars? Perhaps not. But if you've paid for a house, you should be alright. If you don't have a house and have no savings in its stead.. what have you been doing for the 40+ years you could've been earning?!
But - we're not talking about retirement. We're talking about *early* retirement. Compound Interest works its magic on a 40-year portfolio. If you're trying to go from zero to hero in ten years (perfectly possible), there is much much less time available. It also makes the 'what goes where' a lot harder.
If you have passive income, enough to retire on before the government stuff kicks in, presumably that will continue into retirement. And, if so, when you add the government stuff to the early retirement stuff, you will - at the least - be taxed. During early retirement it's entirely possible to live without paying tax - again, assuming you don't insist on the cruises or fancy cars.
I'll make a bold statement: The TFSA is fantastic. Fan. Tas. Tic. Yes, it's after-tax income (ie, no rebate), but it grows tax free. If the Conservatives get in again, and balance the budget, there is a good chance the yearly allowance will be doubled - to $11,000. A year.
I'll say it again: it's fantastic. While you're earning, saving, investing, this money invested (don't put the money into a crappy saving account! The best TFSA out there, People's Trust, gets a decent 3%, but this is FAR below what stocks will return over the longer term!) will grow at - perhaps, on average - 8% a year. Oh, it'll dip some years, jump like crazy other years, but that doesn't matter - over the longer term it will far far far outpace any 'fixed' product.
And that money is usable when you want to. You can draw as much down each year as you need to to live on with absolutely no tax consequences whatsoever! This continues into retirement, OAS & GIS don't take the TFSA into account at all.
If you are in a very high tax bracket, the RRSP is good too. You don't *have* to wait until retirement to draw money out; it will just get taxed as normal income. In fact, a very good early retirement would be to load up the RRSP with money you think you'll be able to withdraw *before* the government income starts.
In other words:
Before retirement: Invest in RRSP (high tax bracket)
Early retirement: Live on RRSP money (low tax bracket)
Traditional retirement: Live on government money (low tax bracket)
Canadian equities that are eligible for the Enhanced Dividend Tax Credit (which means most large companies and 'full replication' ETFs or mutual funds - that actually hold the stocks making up the index, but NOT REITs) are the best thing to hold unregistered in Canada simply because the tax break is awesome. You are not protected from Capital Gains (TFSA is totally protected from CG, RRSP treats CG as *income* on withdrawal so that is actually a negative - as CGs are taxed at half the rate of income!), but - unless you are earning big bucks - the income can tax free, depending on your province (in Ontario, for example, you'd still have to pay the Health Premium on this money). We're talking $55k in Ontario. That is a *lot* of tax (nearly) free dividend income!
The issue of foreign withholding tax in the TFSA vs the RRSP is tricker for early retirees. If you are going to use the RRSP to a significant extent, then foreign stuff should go there. But if you're not, and still want to hold foreign (you should - the Canadian market is very concentrated into just a few sectors, and diversification is every investor's friend. Well - every index investor anyway, stock pickers would no doubt beg to differ!), the withholding tax should be seen for what it is - in the case of US-listed stocks, the withholding will be 15% of the dividends. Capital gains are still safe. In the case of an ETF yielding 2% (which is what the S&P 500 does, at the moment), that's the same as increasing the MER by 0.3%. Great? No. But when you compare managed funds often have MERs in excess of two percent vs index trackers having half a percent - or less! - this is a small price to pay.
My own plan is complicated because I throw real estate into the mix (another post!), but I can live on ~ $12,000 a year, so I would follow the following path:
Put some money into an RRSP, that I can draw down before traditional retirement
Use all my TFSA room each year - especially for REITs, bonds, etc; my foreign allocation will move into here as my RRSP is drawn down
Invest in Canadian ETFs in an unregistered account
Phew - that's it. All that waffle just for three lines? Well, I hope it was useful!
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