Don’t be stressed over retirement savings

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This article was published 25/02/2017 (3296 days ago), so information in it may no longer be current.

The RRSP has reached retirement age.

Or at least it can now start drawing CPP early.

That’s because the registered retirement savings plan turns 60 this year.

But it can’t retire now. We’re still using it. Well, some of us are.

Roughly one in five tax filers — about six million Canadians — contribute annually to an RRSP, Statistics Canada data indicate.

All told we contribute roughly $38 billion annually, accumulating more than half a trillion dollars in savings.

They’re big numbers for sure, but recent surveys suggest we’re anxious about having enough to retire.

A recent poll commissioned by Mackenzie Investments reveals only 38 per cent of Canadians are “confident or excited” about RRSPs.

Flatlanders are even more down on RRSPs as the contribution deadline for the 2016 tax year closes in quickly (March 1). Here, RRSPs only make one in four of us feel groovy.

Moreover, RRSPs are a veritable source of stress for a little more than 20 per cent of Manitobans. Many Prairie folk — 67 per cent of us — just feel “meh” about RRSP saving, up from 61 per cent from last year. Other surveys are equally ominous.

An H&R Block sponsored survey found only 17 per cent of Canadian earners have contributed for 2016, that’s down one from last year (18 per cent). And a recent RBC poll uncovered almost one in two Canadian workers age 55 and up feel they won’t have enough to retire.

The numbers come as no surprise to Carol Bezaire, senior vice-president at Mackenzie Investments.

“The last thing people tend to do is pay themselves,” she says, referring to retirement saving.

It’s especially challenging for those under age 50, who have plenty of competing priorities.

After the mortgage, the car loan, the student loan and other significant costs, very little money (if any) is left.

The rising cost of living and stagnating wages are perennial culprits. But so too is a lackadaisical attitude, Bezaire says. The further away your retirement date is, the more likely you are to put saving on the back-burner — until retirement is a few years away. Then panic sets in.

“Fortunately, you can create your own road map to save sooner than later, but the key to success is that you have to actually take the time to do it.”

Step one: set up a pre-authorized contribution (PAC) plan. But the PAC doesn’t need to be for an RRSP.

It could be for your TFSA instead.

Your choice can boil down to preference. But it’s also a question of income because an RRSP really becomes advantageous if you’re earning more than $45,000 annually. If you’re a low income earner, you’re likely better off contributing after tax dollars to a TFSA than pre-tax dollars to an RRSP — even if you don’t get a tax refund.

The reason is TFSA growth and withdrawals are non-taxable. In contrast, RRSP growth is tax deferred and withdrawals are generally taxable. So if you contribute to an RRSP at a low income level, you might end up withdrawing money in retirement at the same tax rate you would have paid on that contributed earned income.

Even worse: you could end up paying taxes at a higher rate in retirement. Furthermore, the RRSP taxable withdrawals could raise your retirement income to levels where benefits like the age credit and old age security (OAS) are clawed back. By comparison, TFSA withdrawals don’t affect those benefits.

But RRSP contributions are very handy for high earners, says Valorie Elgar of H&R Block in Calgary.

“If you’re in the top two tax brackets, you almost have to do it,” the tax expert says, adding you can get about 50 per cent of your contribution back in your wallet as a tax refund.

“RRSPs are one of the few programs where you have an opportunity after the tax year closes to look at the final numbers and figure out how much you need to contribute to mitigate your tax liability.”

Still, even low-income earners can contribute to an RRSP and benefit. For one, they can hold off claiming the contribution, choosing instead to claim it years later when they’re presumably earning more income, Elgar says.

But RRSP or TFSA, the upside is you’re saving either way.

And the sooner you start, the better off you will be because returns — particularly stock market gains — are compounded to greater effect the longer the money remains invested.

For those just getting started, “robo-advisers are the easiest way to invest and diversify,” Young and Thrifty blogger Kyle Provost says. “The low barrier to entry is a massive deal.”

The Manitoba teacher in his 30s says these online investment platforms allow savers with few assets to make small, regular contributions to a portfolio of low-cost exchange-traded funds (ETFs) that automatically rebalances to meet their goals. This makes robo-adviser platforms an excellent alternative to mutual funds, which often come with higher fees. Yet even mutual funds are beneficial.

“They’re convenient for people who don’t want to invest directly in the stock market,” says Pat McKeough, president of the TSI (The Successful Investor) Network.

He adds people should fret less about how to invest their money — at least initially — and worry more about finding the cash to contribute. That’s because the tax refund alone makes an uninvested contribution lucrative at least in the first year. (Where else can you get a guaranteed, double-digit percentage return on your money?)

Then, when the time comes, give high-quality, dividend stocks serious consideration because they offer relatively stable returns (often at least three per cent per year) outperforming GICs and bonds.

“I would say bonds are an especially terrible investment right now because yields are at a 100-year low, which is like saying bond prices are at a 100-year high,” McKeough says. And what has gone up must eventually go down in value. Not only must bondholders suffer with low returns today, they risk capital losses on their investment when interest rates increase—a likely possibility in this historically low-rate environment.

Consequently, blue chip stocks — big companies with long histories of increasing their dividends — could be a good fit for savers of all ages.

“Some people will say you can’t take the risk of the stock market when you’re past 55 or 65, but that depends,” McKeough says.

Retirement can last 30 years or more, so you likely need some equities to outpace inflation over decades.

And yes, your stock portfolio can fall 30 per cent or more, he says.

“But you don’t have to sell at that price” if you don’t need the cash for several years.

Indeed, all of this is a lot to digest, so to keep things simple, consider this mantra: contribute as much as you can afford, invest as regularly as possible and hold those investments for as long as you can.

And for Pete’s sake: try not to fixate on whether you’re saving enough. That is likely to lead to anxiety, disillusionment and paralysis. Instead, “think about how little you could afford to spend on your current consumption,” McKeough says. That way you’re likely to find more money to save.

And living cheaply today sets you up for living well in retirement.