The financial services industry has done an exceptional job at getting the word out to Canadians about the benefits of registered retirement savings plans (RRSPs). While some may still be a bit fuzzy about all the details of this investment vehicle, most know there are tax perks associated with it. Of course, the looming annual contribution deadline of March 1 gives fence-wobblers a much-needed push to invest for their retirement.
Financial advisors cut through the noise for their clients by giving them unbiased advice and presenting multiple options. But how many factor in the gender differences and inherent risks women potentially face when weighing whether the RRSP is the right investment vehicle for them?
How divorce affects women’s finances
There’s a pernicious myth that refuses to die. It paints a rosy picture that women are the lavish winners in divorce, sitting on their newfound thrones, paid for by their ex-husbands. The reality couldn’t be further from the truth.
Various studies conducted during the past decade or so reveal that women are worse off financially after a divorce or separation than men. One study, in particular, found that after separation or divorce, women’s income declines more than those of men. It suggests that women’s median income for the year of the divorce dropped by about 30 per cent whereas men’s median income decreased by only 6 per cent.
No one wants to anticipate a divorce and no mother wants to think of the prospect of possibly raising her children on her own, financially. But when advisors are working with couples and helping them plan for their future, it’s of vital importance that at some point, the difficult conversation is had with female clients as to the portion of necessary liquidity in their portfolios.
It’s estimated that 90 per cent of mothers received custody of their children, yet only 79 per cent receive some child support. With current estimated costs of more than $310,000 to raise a child to age 18, women are likely to face cash-flow challenges at some point in their lives.
Without adequate emergency savings to draw upon, they face a quadruple whammy if they must liquidate their RRSPs in a time of need as taxes will be withheld at source (a $1,000 withdrawal from an RRSP will not net $1,000); that contribution room is lost forever; they might be selling at a loss; and they may end up paying more taxes the following year because proceeds need to be added to the previous year’s income when filing taxes.
Job instability and establishing ‘good’ debt
Another important element to consider is that regardless if female clients are married, have children, or are navigating life as single, COVID-19 has affected them far more devastatingly than men. Namely, women have been displaced out of hundreds of thousands of jobs, most of them being lower paying.
This stark reality points to the increased need for advisors to ensure the vigorous requirements of available cash on hand – whether through building savings of liquid and available cash in a high-yield saving account to last from three to six months or a line of credit.
The fact is a high percentage of Canadians either simply don’t have a well-funded emergency account to withstand economic or other factors or don’t want those dollars sitting idle in a low-paying bank account.
Advisors need to have conversations that extend far past investments only. For one, a line of credit that’s set up when a woman doesn’t need it provides reassurance and insurance against a job loss, divorce, or the death of a spouse. Furthermore, obtaining it when times are good ensures the lender will provide the line of credit at a lower interest rate.
As long as a line of credit is established to be used only as an emergency, it makes much more sense to take this course of action than trying to scramble once a job is lost, when the bank won’t consider those years of steady income.
To be clear, it’s not that women shouldn’t invest in RRSPs. Rather, they must address questions of cash flow and have a solid and robust emergency fund before locking up funds for retirement that may be needed for day-to-day expenses.
Kelley Keehn is a personal finance educator and best-selling author. She is also a former advisor.