Putting away money in registered retirement savings plans is a force of habit at this time of year. But the inclination – as well as the goals and strategies – can vary for people at different stages of life, from the “Who me, retire?” 20s to the “Do I have enough?” 60s.
“It’s never too early to start investing in RRSPs,” says Howard Kabot, a certified financial planner and vice-president of financial planning at RBC Wealth Management Services in Toronto. “It’s also never too late.”
How and how much you invest in the plans at each age is a matter of financial planning, risk tolerance and, of course, competition from other spending and investments. RRSP contributions have dropped since the late 1990s, as the baby boom generation retires and younger people develop new savings habits.
But Susan St. Amand, a certified financial planner and president of Sirius Financial Services in Ottawa, says that investing in RRSPs “is probably more important now than it’s ever been,” given that employer pension plans have declined, expectations of retirement have risen, longevity as well as health-care costs have increased and returns on investments have shrunk.
Goals and strategies for RRSPs at each stage of life depend on your comfort level, priorities, values and other factors.
The 20s and 30s
In the early years, retirement is “just not top of mind,” Mr. Kabot says, given low salaries and priorities that include spending on or saving for big-ticket items such as cars and down payments on homes. But “if you can possibly find some cash flow,” he says, it should go into RRSPs.
“The math will show you that the earlier you start the better,” he explains, given the “magic of compounding.”
This is the best time in life to take risks, given the broad time horizon before retirement.
Ms. St. Amand says that putting 75 per cent to 80 per cent of RRSPs into equities is fine, although “it depends on your comfort level,” as well as what other investments you have. “You can never look at RRSPs in isolation.”
Young people today are especially living at a time of economic uncertainty and change, she says, compared with when their parents and grandparents were at their age. “It’s hard to think when you’re 20 what life’s going to be like when you retire.”
A recent Royal Bank of Canada poll found that 43 per cent of Canadians aged 18 to 34 hold RRSPs, an increase from a decade-low of 39 per cent last year.
Mr. Kabot says that young people such as university students with summer jobs should file tax returns to generate contribution room, even if it’s to be filled later. By their 30s, they should be putting away 10 per cent of their income for retirement.
The 40s
For many of us the 40s are the catch-up years, with a boost in income, better discipline and organization, retirement already in sight and those ads during RRSP season suddenly ringing in our ears. “You’re starting to understand the relevance now,” Mr. Kabot says.
This is often the time when many sit down with a financial adviser to crunch the numbers and see how much they need – and are on track to have – in retirement. Don’t forget there’s a lot of other financial priorities, with a young family, a mortgage to pay off and saving for education.
Investments in RRSPs should remain aggressive, Mr. Kabot says. “You have a 25-year time horizon until you need to draw the funds down. You can take a little more risk.”
Ms. St. Amand cautions that it can have an “emotional, detrimental effect” for those with RRSPs invested in equities to “now be seeing negatives.” Losses in registered plans cannot be written off against any gains, she notes, and if you withdraw the funds and close the plan entirely you cannot recover the contribution room.
