Are you ready to retire?

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This article was published 17/02/2024 (658 days ago), so information in it may no longer be current.

The deadline looms.

Yet, for many, the fact their last opportunity to contribute to a registered retirement savings plan (RRSP) for 2023 is coming Feb. 29 likely prompts a ‘meh’ or a somewhat sarcastic ‘big deal.’

But the subject is worth some study.

The main reason the Income Tax Act allows RRSP contributions for the first 60 days of the new year to be used for the previous year is to help Canadians optimize those contributions for tax efficiency, says Yannick Lemay, tax expert with H&R Block Canada.

“Contributions you make to your RRSP reduce your net income and your taxable income,” he says.

RRSP contributions are indeed a great tool for high-income earners to reduce their taxable income. They can contribute and defer paying taxes at a higher bracket today, and receive that much-loved refund in the spring. And when they withdraw the money in retirement, they’re hopefully paying taxes at a lower rate than they would today.

Yet, Lemay notes most Canadians — even low-income earners — should consider contributing because contributions reduce net tax. And net tax is used to calculate the Canada Child Benefit, GST credit and Climate Action Incentive Payment, among other valuable credits.

The lower your net tax, the more in benefits you receive.

Of course, it’s not just about reducing taxes or boosting government benefits. RRSP contributions obviously build up our savings so we can retire — and many of us probably have work to do on that front, in light of the findings of a new BMO survey.

It found Canadians estimate needing $1.7 million to retire. Among millennials — ages 28 to 44 — that sum jumps to $2.1 million, the highest among all groups.

It’s understandable millennials think this.

Many have growing families and are paying massive mortgages among other debts, including lingering student loans.

“If you’re in that age group right now, you’re likely in your ‘borrowing years’ and being impacted the most with the prime lending rate going up, too,” says Anthony Maros, senior private banker at BMO Private Banking in Winnipeg.

Whether they’re on track to accumulate more than $2 million in retirement assets depends on how they’re saving for retirement today.

According to the BMO survey, nearly two-thirds of Canadians contributed to their RRSPs last year, averaging so far about $6,500.

Now, if you’re age 18 and saving that much annually, you will have about $2.4 million — providing your investments average a seven per cent return annually — at age 65.

The chances are most adults haven’t been saving that much since they turned 18, judging by Statistics Canada data used in the BMO report, showing the average RRSP account was about $113,000 in 2023.

That’s actually down from about $144,000 in 2022.

“It’s hard to say why accounts fell in value,” Maros adds. “But it may be due to the recent market correction.”

The numbers illustrate a likely disconnect between retirement goals and action.

This is not just a millennial problem. Canadians 50 and older are coming to grips with under-saving for retirement, too.

The National Institute on Ageing, based in Toronto, released its annual survey in January and found only one-third of working Canadians aged 50 and older say they can retire at their desired time. It further revealed four in 10 Canadians in this age group stated they are not in a position to retire at all.

All of this is to say that working Canadians gotta giddy-up on saving for retirement.

Of course, some have other dragons to slay first, says Natasha Macmillan, business director of everyday banking at Ratehub.ca in Ottawa. “If you have high-interest debt, the best use of your money is to pay that off first.”

Macmillan is referring to credit card debt, but even additional mortgage payments in this high interest-rate environment may be a better use of extra cash than contributing to retirement savings.

What’s more, we have other considerations even if we have money to save.

For instance, do you contribute to a TFSA — now up to $7,000 in contribution room per year — or a RESP for the kids’ future? And then, what about contributing to a FHSA?

If you don’t recognize that one, the first home savings account launched last year to help first-time homebuyers get into the pricey housing market.

Faced with all these decisions, folks can feel paralysis. If that’s you, consider seeking financial advice.

Financial advisers can help devise a savings plan, not just for RRSP season but for the longterm, says certified financial planner Doug Nelson, with Nelson Financial Planning in Winnipeg.

Here’s a little taste of what you might get: “At this time of year it is always prudent to look at the income for both you and your spouse for 2023,” he cites as one strategy.

Any additional contributions before the end of the month, he further explains, are best made to the higher income earnings spouse for maximum tax deferral.

Then, the tax refund can be used to make extra mortgage payments or contributions to the TFSA, says Nelson, author of Master Your Retirement: How to Fulfill Your Dreams With Peace of Mind.

It’s a lot to consider with the deadline fast approaching.

But just to keep things simple: if you have extra cash, contribute to your RRSP — tax efficiency considerations aside — because fattening up retirement savings is never a bad thing.

“Even if you contribute more to your RRSP than is optimal for your 2023 taxes, you can still carry that deduction forward to use for tax years to come,” Lemay adds.

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com