Retirement. The second "R" in RRSP stands for it. And yet figures show that millions of Canadians have nibbled at their "retirement" money long before they've actually retired.

The latest indication of this trend emerged this week, with news of a Scotiabank survey that found 40 per cent of respondents had raided their RRSPs for cash not once, not twice, but three times. Among Canadians who had made the plunge, the average amount withdrawn was $18,000.

RRSP early withdrawal programs

The Home Buyers' Plan is one of two programs that allow people to dip into their RRSPs without having to pay income tax on the withdrawal. People who have never owned a home or haven't owned one for more than five years can take out up to $20,000 to finance the purchase of a house or condo. The average withdrawal is just over $10,000.

The other program is the Lifelong Learning Plan, which allows people to withdraw up to $10,000 a year (to a maximum of $20,000) to go back to school.

Both programs require the withdrawn money to be repaid over a number of years.

So why are Canadians tapping their retirement money early? Turns out there are three main reasons. The first is to buy a new house or get a mortgage (37 per cent). One can argue that this is still a wise use of the money, since it's a good idea to eventually own a mortgage-free home — especially once retired and presumably living on less income.

Twenty-four per cent of the "dippers" used the money to pay down debt. One can also make an argument that paying down debt (especially high interest credit card debt) is worthy. But advisors suggest that a consolidation loan might similarly reduce monthly payments while leaving the RRSP intact.

Another 20 per cent needed the money to cover day-to-day living expenses. Not a good sign. If expenses are regularly exceeding take-home income, that's a recipe for financial ruin. There's little to recommend consistently raiding an RRSP as the preferred method of dealing with the difficulty of living beyond one's means.

A 2004 Statistics Canada study backs up the extent of RRSP raiding. The study's authors looked at tax data from 1993 to 2001 and found that 38.9 per cent of the country's RRSP holders between ages 20 and 59 had withdrawn money at least once in that period. Almost half of those who cashed in part of their RRSPs went to the well more than once.

It's worth noting that the StatsCan figures didn't count people who withdrew RRSP money to take part in the federal Home Buyers' Plan. That's the government program that allows people to tap their RRSPs for up to $20,000 to buy their first home. Since 1992, almost 1.4 million Canadians have withdrawn a total of $14.2 billion through the HBP to finance that first home purchase.

Canadians skimming billions from RRSPs

Government figures show that millions more Canadians have gone to their RRSPs for other reasons. In 2004 alone, for instance, more than 1.4 million people withdrew $7 billion from their RRSPs — an average of $4,905 per person.

So if most of the "dippers" aren't going to the trough to buy a home, why then are they making the trip? We can't know for sure, because people don't need to tell the tax department why they're withdrawing money from their RRSPs.

But StatsCan economists found that the death of a spouse greatly increased the odds of a withdrawal. If people lost their job or started a business, they were also more likely to make a large withdrawal.

There's plenty of evidence from polls, informal surveys and back-fence chatter that some people use RRSPs as an income-smoothing vehicle.

Here's a typical scenario: A dual-income couple planning a family starts a spousal RRSP. The husband makes contributions to his wife's plan for several years and then, when the first child is on the way, she stops working, collapses the spousal RRSP and pays taxes on the money withdrawn — ideally at a far lower rate than when she was working.

But there may be a simpler reason why so many of us are using RRPSs as a quick source of cash. Because we can.

Contributions we make to company pension plans are locked in — after a short vesting period, we can't get our mitts on the cash. But as long as we're willing to pay the tax, we're free to tap our RRSPs any time we want. No need to borrow. Just plug in the spigot and pour. The RRSP pot is just too tempting to pass up.

And it's quite a pot. As of 2004, Canadians had about $400 billion socked away in RRSPs.

Early dipping has its costs

Financial planners point out that people who withdraw money from an RRSP pay a price that goes beyond the immediate tax hit — they lose the benefit of that money compounding for years in a tax-sheltered environment.

If the money is withdrawn to buy a home or to go back to school, there's a good argument that the withdrawal still makes good economic sense, as home ownership and higher education are both likely to improve a person's financial circumstances in the long run.

That's the rationale behind the two federal programs that allow tax-free RRSP withdrawals (see fact box).

But for the millions of others who've taken the RRSP dip, experts say the risk grows that when it comes time to start reaping the benefits of all that saving, there may not be enough in the kitty to guarantee that your money will last longer than you will.

The stats show that much of the money that is withdrawn early from RRSPs is never repaid. Government retirement income programs like OAS and CPP only go so far. And most Canadians don't have company pension plans.

If you want a quick check to see if you're on track for an adequately-funded retirement, try Service Canada's online interactive Retirement Income Calculator.

The findings may reassure you. Or they may suggest that those short-term RRSP raids may be doing some long-term damage.

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