Why We Don't Invest In Retirement Accounts

This one idea broke us out of the matrix.

“You want me to WHAT?” I asked.

“Withdraw your RRSPs now and pay the fine,” my tax advisor said to me.

It was 2014 and I was filing my income tax for my very first year in business.

Since I had entered the workforce as an employee of McDonald’s for $6.50/hour in 2005, I had put money into my retirement savings account.

(They’re called the RRSPs here in Canada).

Why wouldn’t I? It meant I could pay less tax NOW and have a nice nest egg for when I was 65 and could retire.

He continued, “You don’t seem the type to be making LESS money when you’re older than you are now. If you put this money into your retirement fund, you’ll have to pay tax on this income when you’re in a higher income bracket in the future.”

Huh. I’d never really thought about being 65.

Wouldn’t I be making less money? What about retirement?

So, I shrugged and withdrew it, paid the fine and went on with my life.

I hadn’t invested a single dollar into my retirement account since I took it out in 2014.

It wasn’t until a couple of years ago when his words came back to me in complete clarity.

The Wonder of Compounding

Sitting together on our deck, discussing our investment portfolio and how it had grown, my husband and I saw something we couldn’t unsee.

Because we continuously invested into funds that increased our cash flow, our monthly income continued to climb.

In August of 2021, we were averaging $2,948/month in distributions.

In August of 2022, we were averaging $4,650/month.

In August of 2023, $5,741/month.

This month (August 2024), we’ve earned $7,084.

Notice something? Every year, we are earning MORE on average every single month because we continued to reinvest our earnings.

This is the power of compound interest.

Check this out 👇. It’s my favorite tool on the internet.

The compound interest calculator (click here).

This calculator gives you an idea of what your investment would be worth if you continuously added the money you earned back into your investment, AKA compounding.

I put in the amount we currently have invested in our portfolio (~$700,000) and asked it to compound our earnings monthly until I’m 65 when I would supposedly “retire” in 30 years.

I took the yield on our current portfolio, which is 11.25% annually, and plugged it in.

Theoretically, if we reinvested every penny we made for the next 30 years and sustained our 11.25% yield, our portfolio would be worth $20,052,501.64 by 65 years old.

Twenty million.

We would also be generating $2,124,246.15 per YEAR in income.

That’s $177,020/month.

That’s A LOT more than what we’re making now, which is $7,084/month.

Kind of mind blowing, hey?

EVEN IF the distribution rate went down to 8% and we only reinvested half of our income and lived off of the other half… we’d still be earning way more than $7,084/month.

Now think about this - if I piled money away into our retirement accounts just to take it out at 65 and pay tax on it, we’d be paying tax in a MUCH higher income bracket.

Even with the tax free growth we’d get inside the account, it didn’t make sense for us.

Why?

Because I’m going to be making MUCH more money as I get older. Not less.

Our plan isn’t to rely on government pension plans, forced savings (retirement accounts) and a nest egg to fund our life through the years.

Our plan is to have our money work for us so we don’t have to.

Our plan is to watch our monthly distribution income increase, year after year.

I want to travel luxuriously.

I want to continue a work optional life.

I want to spend time and money on causes I find important.

This is what I define as a legacy.

This is the legacy I want to leave my children with.

Not only will they have time with me, which I think is the biggest legacy of all, but a robust portfolio to secure their financial future.

My favorite part? I can’t wait to teach them how to grow investments of their own and become savvy investors.

As an investor myself, there is something special about being able to tell your parents to enjoy every cent of their money and not worry for one second about leaving anything to us.

Spend it. Live fully. Retire early.

Not one penny needs to go to us.

Final Thoughts

Our way of thinking isn’t for everyone, I’m fully aware. This isn’t financial advice either.

But for us? We didn’t want our money locked away for another 30 years just to pay at a higher tax rate later.

Some people love retirement plans and I’m glad it works for them.

But if my tax advisor hadn’t shaken up my thinking all of those years ago, I might have fallen into the system, not knowing there was another way.

Reaching 65 doesn’t mark the beginning of freedom.

Freedom begins now.

Tanessa

P.S. - I’m curious, have you made your retirement account work for you?

Please share how in a comment on The Freedom Diaries. I’m always open to learning something new :)