RRSP Refresher

Wed, 2014-02-12

Gordon Pape calls them the "ultimate wealth builder."   I agree.  The RRSP accomplishes 3 primary goals.  Immediate tax deferral, tax-sheltered growth and control over how that income is received in the future.  They are flexible, largely creditor proof and the last decade has opened up liberal rules on international investment opportunities. 

Should you take a loan for your contribution?   Provided it can be paid back quickly this may make sense.  However, for most making monthly contributions with a view to topping up prior to the deadline is best.  This implements discipline and avoids unpleasant surprizes in today's job climate.  In addition, this also accomplishes dollar cost averaging but so do annual contributions- over time. 

I saw a poll that said only 1 in 3 would make a contribution this year.  With recent declines in job numbers in Canada this isn't a huge surprize.   However, the poll also cited that BC would have the lowest rate of contributors (20%) and the highest rate of withdrawals (42%) in the country.  The first looks a little low, the second too high.   Time will tell.

A caller to a popular news radio station didn't mince his words. "Jim Flaherty is telling me that I'm not saving enough for my retirement.  I'll tell you why I'm not saving.  The cost of living keeps going up.  Every time I turn around there is a toll on this or that.  Hydro goes up, my taxes are going up and my take home pay has not marginally improved in the last 20 years.  I don't have any money left to save."

It would be easy to agree with him.  Vancouver is one of the most expensive cities to live in Canada with mortgages gobbling up an estimated 50% of take home pay for many.   It's also among the most congested places to drive.  Tolls are on the increase, parking expensive and a referendum on further taxation to public transit on the horizon.

While nothing he said was untrue in retrospect he was justifying that it's ok not to save cause it's tough and it's only getting tougher.

If that's true, then it must be untrue that an aging population and increased longevity will require more money to fund that inevitability.

You don't have to contribute to RRSPs.  You do need a plan to fund your retirement.  For most, the RRSP is part of the solution.