|How an RRSP could save your retirement
Monday February 13, 2012
Will we all outlive our pensions? Will we even have a pension?
These are a couple of scary questions that are of more than
just academic interest. And they’ve been preoccupying headline
writers for the past few weeks. First, the federal government
floated the possibility that the eligibility-age for Old Age
Security might have to be raised to 67 from 65. Even worse,
many Canadians are still not taking steps to provide their own
retirement funding to supplement that government pension, by
contributing enough (or even anything) to registered plans like
RRSPs. So what can we as individual investors do?
Pension changes coming
Forced by the realities of demographic change and stretched
financial resources, many governments in Europe have already
changed retirement benefits recently, so citizens have to be
older before they can apply. Due to the similarly changing demographics
in Canada (longer lifespans and an aging demographic are making
the current system financially unsustainable in the longer term)
combined with lower expected investment returns generated by
the Canada Pension Plan, I would not be at all surprised if
we see a move towards the age-67 threshold sooner rather than
What this means for you is that you have to be especially diligent
regarding looking after your family. If you retire at 60 and
want the maximum CPP, you must use other sources (RRSPs, employer
pensions, open investments, and/or TFSAs) to fund your retirement
for seven full years before the CPP kicks in. That’s a long
time and a lot of money. If you decide to take the CPP earlier,
you will pay a penalty by receiving less money overall for as
long as you live.
If you are under 50 years of age, you have lots of time, but
still need to bump up your savings to a level in the range of
10% to 15% of income. If you are over 50, all is not lost. Your
mortgage should be close to being paid off and your kids may
soon be out of the home. What that means is you might be able
to seriously save for five to 10 years to build up your nest
Do not expect some “windfall” (an inheritance, a lottery win)
to save you. That is reckless behavior, and your penalty will
be that you’ll be working longer, while your friends are golfing
and travelling. After working 30 plus years, you shouldn’t be
among the retired poor, but you need to take steps to ensure
that won’t happen. Retirement (old age) sneaks up on you, so
Contribute to an RRSP – now
According to Statistics Canada, the median RRSP contribution
for 2010 was only $2,790. A whopping 93% of tax filers could
have invested funds in an RRSP but only 26% actually did. That’s
a pretty sad and depressing statistic.
I know markets have performed poorly, but that is no excuse.
You could invest RRSP contributions in money market funds, guaranteed
investment certificates (GICs), or other guaranteed instruments.
For taxpayers in the higher tax brackets, that means a guaranteed
30% to 35% return (in the form of tax savings), even before
any investment return. You won’t find a better return anywhere.
As an added bonus, you get to keep all the money invested too.
Yet people don’t invest. Why not?
Another favorite excuse is, “I can’t afford to contribute to
an RRSP.” This is a sad excuse, because many of those same people
can afford regular $6 coffees from Starbucks and $9 beers while
watching the Leafs, Jets, Canucks, or Lions on the big screen
at their favorite watering hole.
Not austerity, just common sense
I’m not advocating an austere, Spartan lifestyle by any means.
But set up a monthly automatic investment or savings plan, no
matter how modest it might seem. Make sure you strike a balance
between living life now and preparing for what lies ahead, when
you either stop working or are forced to quit, as many are,
owing to failing health or a downsizing with their employer.
The hard reality is that many people don’t get to decide on
when they retire. It’s often forced on you by your employer
or, increasingly, your health concerns.
Live within your means. Don’t spend more than you make on a
consistent basis and put something away every month. Don’t ever
touch it unless you are in really dire straits.
Do this, and do it consistently, for many years and everything
will work out in the end, regardless of the financial markets’
ups and downs and whatever life might throw at you (and these
are unavoidable). But consistency is the key. Like your good
health, consistent good financial habits are the key to success.
A proper diet, plenty of exercise, and steering clear of bad
habits like smoking give you an excellent opportunity for long,
healthy life. Likewise, consistent good financial habits – planning,
saving, and discipline – give you an excellent opportunity for
a long, financially secure retirement.
Generic Mutual Fund Disclaimer
Commissions, trailing commissions, management fees and expenses
all may be associated with mutual fund investments. Please read the
simplified prospectus before investing. Mutual funds are not
guaranteed and are not covered by the Canada Deposit Insurance
Corporation or by any other government deposit insurer. There can be
no assurances that the fund will be able to maintain its net asset
value per security at a constant amount or that the full amount of
your investment in the fund will be returned to you. Fund values
change frequently and past performance may not be repeated.
Personal Opinions & Recommendations Disclaimer
The foregoing is for general information purposes only and is the
opinion of the writer. This information is not intended to provide
specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice. However,
please call the author to discuss your particular circumstances.