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.

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