INDEPTH: RETIREMENT
Saving on your own
by Peter Hadzipetros, CBC News Online | Research: Laura Carlin | Feb. 11, 2005
Here's that line again: if you're like most Canadians, outside of your home, your Registered Retirement Savings Plan is your single biggest investment.
QUICK FACTS
|
Maximum Canadians could have contributed to RRSPs in 2003:
$310 billion
Actual RRSP contributions 2003
$27.6 billion
|
Almost two-thirds of Canadians have stuck some money into RRSPs, according to an Ipsos-Reid poll commissioned by RBC Financial (the folks we used to know as the Royal Bank, Canada's biggest bank). That's up from 57 per cent, just two years ago.
The poll also found that just under half the people it surveyed planned to put money into their RSP in time to claim the tax credit for the 2004 year.
That same poll found that the market value of the average RSP is about $64,000 – and that most RSPs were heavily invested in mutual funds.
These numbers shouldn't really surprise anyone. After all, if you're a working Canadian, you've been told forever that socking money away in a RSP is the surest way to guarantee a long and prosperous retirement.
Thing is, it wasn't always that way. In fact, RSPs are a fairly recent invention, born at the height of the baby boom.
They came to be in 1957, as a provision of the federal budget. A change in tax law allowed people to set aside 10 per cent of their income – or up to $2,500 – in a special retirement account. The money would be allowed to grow tax-free until it was withdrawn.
If you started at the age of 20 saving $100 a month in an RRSP and it grew by 7 per cent a year, you would have $381,471 when you turned 65. If you waited until you were 45, you would have to deposit $750 a month to have about the same when you turned 65.
|
And they caught on like wildfire - 30 years later - around the time the big banks got in on the act and when the phrase "mutual funds" became part of everyone's lexicon.
Every dollar you put into an RSP reduces your taxable income by a dollar. The money grows tax-free until it is withdrawn. The theory is you will be in a lower tax bracket when you retire, so the tax hit won't be so severe.
By 1990, the federal government tweaked the rules some more, in a bid to get people to take on more of the responsibility of saving for their retirement.
The goal was to level the playing field between people who had pension plans through their employers and those who didn't. Contribution limits were increased (18 per cent of income to a maximum of $15,500 for the 2004 tax year). If you're a member of a pension plan at work, your RSP contribution limit is reduced by the value of what goes into your company pension.
When you receive your T4 slip at the end of February, Box 52 contains your Pension Adjustment. If the figure in there is $9,000, your RSP contribution limit would be $6,500 (assuming you're one of the relatively few Canadians who made just over $86,000).
If you make $40,000, you can set aside up to $7,200 a year in tax-sheltered retirement
savings – either in an RRSP or in a combination of RRSP and RPP (your company's contribution reduces what you can put into your RRSP).
Believe it or not, not everyone can sock away the maximum they're allowed to every year. In 2003, Canadians could have put away $310 billion in RRSPs. Total contributions for that year amounted to $27.6 billion – about nine per cent of the available contribution room.
QUICK FACTS
|
Private pension assets in Canada (1999)
More than $1.012 trillion
Amount in employer pension plans
$604 billion
Amount in RRSPs and RRIFs
$408 billion
|
If you do fall short of your maximum, you can make it up in future years by carrying forward any unused RRSP contribution room.
A good thing, too, says Ron Laursen, an expert on retirement investment strategies and a senior vice-president at Scotiabank. He figures the average Canadian needs about $500,000 in an RRSP to live comfortably in retirement. That's on top of C/QPP and OAS benefits.
"You really have to figure out what your own situation is, what you really need in retirement."
Laursen concurs with those who recommend you have enough set aside to pay you 70 per cent of what you earned while working.
"That will let you take the occasional trip. It won't set you up in a Tuscan villa."
Half a million dollars may sound like a huge amount and a goal that would be tough to attain on the average income. And that's true – if you wait until you're a few years from retirement.
Start young and the story's a little different: if you set aside $1,000 a year starting at the age of 25 and your investments grow by eight per cent a year, you will have almost $280,000 in your RRSP when you turn 65.
If you were 10 years from retirement, you would have to put away almost $18,000 a year to accumulate the same amount.
But for some, RRSPs may not be such a great investment. In fact, they could wind up costing you more than you save.
If you're a low-income senior and you collect the GIS, your benefits will be cut 50 cents for every dollar your RRSP pays.
A 1993 study by the C.D. Howe Institute concluded that RRSP savings of $100,000 or less are "futile." The study found that people who don't save for retirement may come out ahead financially compared with those who save $100,000 or less in RRSPs.
Alan Dickson, a former financial planner, says people shouldn't be swayed by RRSP hype.
"Every Canadian should want to be able to look after their needs," Dickson told CBC News. "But there comes a time when you say, 'is this a need or is this just an additional tax I'm paying because the government has flagged me as having extra money?'"
Dickson says RRSPs can serve a purpose.
"They're great to take early retirement, maybe to bridge a period before you get Canada Pension. That's a good idea."
Roger McMillan, Financial Advisors Association of Canada
|
Roger McMillan, a member of the board at Advocis – The Financial Advisors Association of Canada – says people need to balance their needs and obligations during their working years with what they want to do in retirement.
"Retirement is going from a two-day weekend to a seven-day weekend," McMillan told CBC News Online. "If I'm talking to someone who's 55 years of age and they really don't have a lot of assets and all they're depending on is CPP and Old Age Security and a little bit of a company pension plan, then I think it's incumbent on [a financial planner] to gently tell them that you may not be able to retire comfortably at age 65."
"There are only two sources of money: people working or money working for you. If … people understand that, they'll be more readily accepting of solutions in that they have to pay themselves first."
What happens to your RRSP?
Should you die before you get to enjoy all that accumulated wealth, your RRSP can pass tax-free to your spouse. If there is no spouse (common-law or otherwise), the money goes to your estate. But it is counted as income – and taxed accordingly. If there's a lot of money in there, Ottawa's take could be 50 per cent or more.
That's one of the reasons the government is willing to give you such a generous tax break when you contribute to an RRSP: the tax folks stand to collect much more later on than they're giving up today.
Still, you have to move your money out of your RRSP at the end of the year in which you turn 69. There are a few things you can do.
QUOTE
|
"There are only two sources of money: people working or money working for you."
Roger McMillan, The Financial Advisors Association of Canada
|
Take the money as cash
Not necessarily advisable. When you withdraw your money, it is regarded as income and you'll suffer a major tax hit – if you pull it all out.
You might want to reconsider.
Buy an annuity
The "savings bonds" of retirement funds, these pay guaranteed amounts for a fixed term – or for as long as you live. You will always know how much money you can expect and how much you will have left.
RRIFs
This is the most popular choice. Your money goes into a registered account that can be invested in bonds, stocks and mutual funds – but you are required to withdraw a certain amount every year. If your investments underperform or you take out money too quickly, you could run out.
You could also maintain any combination of the above, depending on your savings and your needs.
We haven't touched on some of the retirement investment possibilities like spousal RSPs and reverse mortgages – or looked at ways of saving for retirement outside of an RSP. There's plenty of material on both on the web, in the library or through financial planners.
You might want to take a look at one tool we did come across: The Canadian Retirement Income Calculator, prepared by Human Resources Development Canada, takes you through a number of scenarios to give you a good idea of the income you can expect to live on in retirement, based on your current situation.
It also computes how deeply your OAS benefits will be cut if you're a higher-income retiree. And it won't try to sell you anything.
» NEXT: RETIREMENT MAY NOT MEAN RETIREMENT
^TOP
|
|
 |
 MENU |
|
|
| NEWS ARCHIVE: |
Britain to raise retirement age (May 25, 2006)
Richmond tops life expectancy list (CBC BC, Feb 2, 2005)
Canadians made little economic headway in past 15 years: TD economists (Jan 18, 2005)
Pension legislation changes on the way (CBC Manitoba, Dec. 7, 2004)
Ontario court upholds CPP benefits for same-sex couples (Nov 26, 2004)
Mandatory retirement ban won't be retroactive: labour minister (CBC Ottawa, Nov.3, 2004)
Martin against mandatory retirement (Dec. 20, 2003)
|
|
| MORE: |
|
|
|
