RRSPS remain relevant despite our shifting priorities
Is it over? Has the love affair with the RRSP, first introduced in 1957, soured as Canadians turn their attention to fighting ballooning debt? Do they prefer the odds of the housing market to the paltry returns they have seen since the financial crisis?
Sure RRSPs are a great way to defer taxes, but is our financial literacy sound enough to make sure we make the most of that advantage? Is saving at all taking a back seat to the prevailing advice to pare down debt before interest rates rise?
The RRSP was first introduced as the government’s plan to help us save for our own retirement and supplement the Canada Pension Plan, but today the overwhelming majority of Canadians fail to make full use of the fact they can contribute up to 18 per cent of their previous year’s earned income.
The latest information from Statistics Canada going back to 2011 shows only about six million Canadians made an RRSP contribution. The amount of unused RRSP contribution room is now more than $500 billion.
So even as income security provided by private pension plans declines and the age to collect old age security will be increasing for many now in the workforce, we are saving less, not more.
The key debate this year seems to be whether to pay down debt or make that RRSP contribution. Household debt to income — all debt divided by after-tax income — reached a record 164.6 per cent in the last quarter.
Canadians listed paying that down as their No. 1 priority for 2013 in a Canadian Imperial Bank of Commerce survey. The survey found 17 per cent listed reducing debt as their top financial priority while only seven per cent picked retirement planning. Two years ago, retirement planning was listed by 13 per cent as a top priority.
“Credit card debt has a high interest rate by its very nature and it’s unlikely no matter how well you do in your RRSP or TFSA you’ll beat [the rate on your debt],” says Jamie Golombek, managing director, tax and estate planning with CIBC.
That’s probably true of all debt with the exception of mortgage debt, which can be as low as three per cent for some consumers these days.
“You may want to direct any extra money into a long-term savings vehicle with a higher expected rate of return,” said Golombek, adding returns will obviously vary based on the risk you are willing to take on.
It’s also hard to convince consumers to save, given the poor performance of many investments, says London-based author Talbot Stevens. “Returns, regardless of the type of investor you are, for the last decade or so have not been fun.”
Besides, investors may wonder, who needs a retirement plan if you have a house that has doubled in value over the past decade? Then there’s the tax-free savings account — now five years old and eligible for $25,500 in contributions over that period — a far more flexible vehicle for depositing and withdrawing money.
“Are RRSPs relevant? Yes, in the sense that people need to save for retirement and generally we are falling further behind,” says Stevens. “Income security is not as great as it used to be. We need to actually save more.”
Talbot says how we save is more relevant than ever.
“For most middle and upper income Canadians, RRSPs are still the way to save,” he says. “People used to dream about retiring at 55, but since the market crashed, people realized they are going to have to work a little bit longer.”
Still, our saving rate has slowed. A Toronto-Dominion Bank study released this week found 15 per cent of Canadians will spend five years or less saving for retirement, even though 69 per cent of retirees wished they had saved for 25 years.
Canadians just don’t seem to have any money. A poll from the Bank of Nova Scotia released Tuesday found 64 per cent of Canadians cited affordability as a barrier to investing, up from 59 per cent a year earlier.
The TD poll found many working Canadians have come to grips with the new reality, with 36 per cent planning to work until after 65. Another 16 per cent of Canadians plan to work into their 70s.
Talbot says there remains a fundamental problem with the RRSP — namely many people seem oblivious to the fact the money will eventually be taxed.
“People are not investing as much as they think. If you take $1,000, and keep the math simple and use an outdated 50 per cent tax bracket, that $1,000 needs to become $2,000 in the RRSP,” he says.
What often happens, he says, is people will put $1,000 in their RRSP and just spend the $500 refund. What that does is turn $1,000 of after-tax money into $1,000 of before-tax money because your refund is blown and now you have money sitting in an RRSP that has yet to be taxed.
Fred Vettese, chief actuary of Morneau Shepel, says it’s easy to see where some people might be spending potential savings. “Housing,” he says. “There are intellectual reasons why [savings] should be dropping, housing has become so expensive so they have to pour all the money into their mortgage.”
Perhaps that’s why Canadians view their principal residence as a key component of their retirement. A Bank of Montreal survey last year found 41 per cent of Canadians are counting on their home value to bridge any retirement shortfall.
Cynthia Caskey, vice-president, portfolio manager and sales manager of TD Waterhouse Private Investment Advice, expects the usual crunch of RRSP activity in the first 60 days of 2013 (before the March 1 deadline) as people try to lower their taxable income for 2012.
“More people are thinking about saving and have retirement on the brain,” she says.
Don’t throw out that piggy bank; start saving now for your retirement.