Since they were first introduced in 1957, Registered Retirement Savings Plans (RRSPs) have become one of the best-known and most popular retirement savings vehicles. Yet Canadians still are not taking full advantage of the tax deferral savings they offer.
Even though the number of people in this country who have retirement plans is actually dropping -- which makes saving in RRSPs even more important for building a retirement income -- Canadians now have about $500-billion in unused RRSP contribution room, and that figure is growing every year.
According to Statistics Canada, just fewer than 6.2 million tax filers contributed to RRSPs in 2008, down 1.8 per cent from 2007. Among investors, the value of deposits in RRSPs declined by about 2.2 per cent to $33.3 billion, which represented about 5.3 per cent of the total room available to tax filers, down six per cent from the previous year.
With so many studies and information coming out these days indicating that many Canadians are not financially prepared for retirement, why aren't they taking full advantage of their RRSPs?
"There are basically two reasons," says Bob Jamieson, a financial adviser with Edward Jones in Ottawa. "Younger Canadians just have a lot of other priorities that might seem more important, such as buying a home or raising a family."
"Among older Canadians, a lot have the mistaken impression that the government will take care of their retirement and they don't need to think about it," Mr. Jamieson says. "This is sad, because government pensions such as the Canada Pension Plan and Old Age Security, while being helpful, together may only provide $10,000 plus a year, which for most people is not enough to support a reasonable lifestyle in retirement."
Mr. Jamieson says he recommends his clients start saving for retirement as soon as they start working, either through an RRSP, Tax Free Savings Account (TFSA) or by purchasing real estate such as home.
In Canada you are allowed to contribute up to 18 per cent per cent of your earned income each year up to a maximum of $22,000 into your RRSP. Any unused contributions can be carried forward to future years and there are no limits on topping up your under-contributions.
Depending on your income level, if you do have a lot of unused room in your RRSP, you may want to spread your contributions over several years to optimize the tax refund.
If your income is under $40,000, it may be better to contribute to a TFSA because you will not get the tax benefit from contributing to an RRSP.
Mr. Jamieson tells his clients to try and save 10 per cent of their income on a monthly basis. "Once they see how that money can grow over time, they're usually very receptive to the idea," he says. "Even new graduates should start investing in a TFSA and then, when they start making a better salary, they can transfer that money in kind into an RRSP."
A house is a good means of saving for retirement if it's your principal residence because you do not pay tax on the capital gains.
Over the years, real estate has proven to be one the best growth assets available.
According to the Canadian Real Estate Association, the average price of a home in Canada increased to $339,945 in July, 2010 from $67,024 in 1980, a 407-per-cent increase in 30.5 years, or an average yearly increase of 13.3 per cent.
If you are stuck with a mortgage, Mr. Jamieson recommends you continue to pay off the mortgage but also make some contributions to your RRSP.
If you have made all the contributions you can to your RRSP and TFSA, Mr. Jamieson suggests investing in a non-registered account where you can receive dividend tax credits.
"It's well known that RRSPs in themselves are not sufficient to save enough money to build an adequate retirement income," Mr. Jamieson says. "Retirement can seem like a long way off, but it's important to remember to stay diversified and to invest for the long term in something that will give you a reasonable rate of return that you can draw on in the future."