By Greg Pallone

Although nearly two-thirds of Canadians save for retirement, only 35% use a Registered Retirement Savings Plan (RRSP) to do so.[1] With workplace pensions covering only 20% of the private sector, RRSPs have become the main conduit to supplement Canada Pension Plan and Old Age Security payments.

Younger workers tend to have Tax-Free Savings Accounts (TFSA), but TFSAs do not allow pre-tax contributions the way the RRSP does.

For the 2020 tax year, you can contribute up to 18% of your earned income from 2019 to an RRSP, to a maximum of $27,230.[2] What’s more, any unused contribution room is carried over and added to the next year — but most Canadians have accumulated thousands of dollars of contribution room that they’re unlikely to fill.

An RRSP is useful not only for retirement savings, but also for current tax savings. For example, those in a 40% tax bracket making a $5,000 contribution to an RRSP nets tax savings of $2,000.

Saving for retirement comes amidst unprecedented investment volatility and consumer uncertainty about the future. That may make investing and financial planning feel overwhelming, but at its most fundamental, it’s about keeping calm and saving incrementally and regularly for as long possible.

With that in mind, consider these tips for making the most of your Registered Retirement Savings Plan:

  1. Stop procrastinating. If you don’t already have one, set up a RRSP yourself or through a company-sponsored plan. The longer you wait, the harder it becomes to build a basic retirement income.
  1. There is no RRSP season. Coming up with thousands of dollars at year end can seem impossible. However, contributing a smaller amount monthly — especially through your employer or an automatic contribution from your bank account — is relatively painless and produces a better return over time.
  1. Embrace some risk. 2020 will be remembered for periods of extreme market volatility due to the COVID-19 pandemic. Yet over the long run, higher-risk equity investments like stocks, mutual funds and ETFs perform better than fixed-income instruments like bonds, money market funds, or Guaranteed Investment Certificates. A portfolio with both types of investments is essential to long-term growth. (Always determine your risk tolerance and how close you are to retirement before altering your asset allocation. Consult with a professional if needed.)
  1. Use dollar-cost averaging. Regular contributions through dollar-cost averaging reduces portfolio risk. By investing in small amounts over time — think monthly or for each paycheck — you don’t have worry about investing too much in an overheated market or missing out when prices are low.
  1. Remember, an RRSP is a retirement savings plan, not a short-term savings account. Successful RRSP savers don’t withdraw money early from RRSPs until retirement. No matter the reason, whether a down payment on a home or paying for education, it’s hard to make up the money and potential retirement income from withdrawals.
  1. Do I have enough? This is one of the most common questions asked of financial planners. The answer is almost always, “It depends.” The general rule is that with a 4% to 5% withdrawal rate, you should have saved enough to generate 50% to 70% of your annual income just prior to retirement. Ultimately, the amount depends on your lifestyle, health care needs and where you plan to live. A financial advisor specializing in retirement planning can help establish your income goals.
  1. Review your asset allocation. Make sure your asset allocation fits your risk tolerance and long-term savings goals. If you aren’t using one of the target date funds available from your employer’s plan administrator or most financial institutions, review your asset mix at least annually, or even more frequently during market runups or corrections.
  1. Seek advice early and often. Even the most experienced investors have retirement planning advisors who are skilled at tracking progress and help establish a retirement income goal. This kind of long-term advice can help relieve the stress from the inevitable ups and downs of investing.

HUB International’s team of qualified retirement plan consultants have extensive experience with all aspects of retirement planning, including Registered Retirement Savings Plans, TFSAs and other savings plans.

 

[1] https://www12.statcan.gc.ca/census-recensement/2016/as-sa/98-200-x/2016013/98-200-x2016013-eng.cfm

[2] Check the bottom of the second page of your annual tax assessment from Canada Revenue Agency.