Think it’s too late to plan for a comfortable retirement? Think again.
Randall and Louise Mang have done many things right when it comes to achieving their retirement goals. While raising their blended family of six children has consumed the bulk of their income over the years, they pay off their credit card bills in full each month and make additional mortgage payments whenever possible to help keep their debt in check.
But like many Canadians, the cloud of uncertainty looming over their financial future is their RRSP investments. “Beyond the contributions we make to our RRSPs, we haven’t seen any substantial growth over the last 10 years. In fact, we’ve come to realize that administrative fees are eating away at the money we put in,” says Mr. Mang.
Their situation is far from unique. According to the 20th Annual RBC RRSP Poll, released in January, 48 per cent of Canadians who have not yet retired are worried about having enough savings.
To get back on track, Lee Anne Davies, head, Retirement Strategies, RBC, recommends starting with a bit of a post-mortem on your retirement saving strategies to date: “What is it that you feel has derailed you?”
One common scenario relates to the current economy. “There may have been a fear of job loss, or even a period of unemployment. Many people focused on reducing debt, and stopped making RRSP contributions entirely,” she says.
Many other Canadians have sought safety at the cost of potential returns due to the extreme volatility of market conditions, observes Ms. Davies. “People have moved to more conservative investing in the last couple years, but we want to avoid an overreaction – over the longer term, disciplined investing is always the most effective way to reach your investment goals.”
Working with an advisor to revisit your risk profile, in light of your long-term objectives as well as your new market awareness, can be a very useful process. “We know equities fluctuate in value from day to day, but as long as your portfolio is appropriately diversified, they are effective ways to preserve your portfolio’s purchasing power,” she says.
Life challenges such as divorce, disability and real estate losses can also put strain on retirement plans. When they do, she advises, “It is back to identifying what your goals are. Then have a talk with your advisor about why you think it might be too late to achieve those goals. He or she can help you assess what you’re trying to achieve and what is reasonable to expect.”
For Mr. and Mrs. Mang, transforming their RRSP from a worry into an efficient retirement savings engine may just require a slight shift in strategy. With several of their children successfully launched, they’re able to save more for the future. And while they originally invested directly in stocks that seemed promising, they’ve learned the hard way that stock-picking requires a time commitment that doesn’t fit their busy lifestyle.
Instead, they’re now adopting time-tested investment basics: investing in low-cost, broadly diversified index funds, keeping part of their portfolio in guaranteed investments to mitigate volatility, and rebalancing their portfolio once a year to a predetermined asset allocation.
“I’ve seen the ups and downs, and have learned that investing requires you to pay attention,” says Mr. Mang.
One option available to baby boomers who have fallen behind in their RRSP contributions but find themselves with increasing cash flow is borrowing to catch up. “You have to do the math, of course,” says Adam Scherer, partner, Taxation Group, Soberman LLP. “Weigh out the cost and benefits – considering your contribution room, tax savings both current and future, and potential returns, versus the interest payment.”
RRSP loans are often made available with very attractive terms, including lower interest rates and flexible payments, Mr. Scherer notes. “I believe in trying to get as much money within the tax shelter as you can, so I’m a proponent of borrowing to fund your RRSP if necessary. You know that you’re going to get money back from the government to help pay off the loan, and you usually don’t have to make a payment until your tax refund comes in.”
In addition to catching up on existing contribution room, you may also want to consider going a step further, he says. “A prudent advisor would suggest over-contributing $2,000, the amount you can go over without paying a penalty. It’s a small way to generate more tax-free growth in your RRSP.”
Tax strategies help put an RRSP to full advantage
For people in the early years of their career or business, an RRSP deduction can result in more of a fizzle than a bang when it comes to a tax refund. Delaying those deductions for later years – when income and taxes are higher – can result in a significantly greater benefit.
But that doesn’t mean you shouldn’t contribute to an RRSP, says Adam Scherer, partner, Taxation Group, Soberman LLP. “I recommend putting in what you can. When income tax time comes along, figure out what your deduction should be. If you have a year in which your income dips below a number at which it’s no longer cost-effective to make the deduction, you can carry it forward to future years.”
It is possible to carry forward both unused contributions and RRSP deductions. “Note it on your tax return as a contribution, but don’t deduct it until it is beneficial to do so.”
