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Personal Finance It’s time to stop pretending RRSPs are a universal retirement-savings vehicle

RRSPs are going grey.

Owing to expensive real estate and the advent of tax-free savings accounts (TFSAs), adults in their 20s through 40s have less of a presence among contributors to registered retirement savings plans than they did a decade and a half ago. Meanwhile, people aged 55 and up are starting to dominate.

It’s too soon to tell if this emphasis on TFSAs and real estate is harmful, neutral or even beneficial for younger adults. What we do know is that hyping RRSPs as a retirement savings vehicle for all is starting to look pointless. They’re much more a tool of people at the apex of their career – high-earning home owners who can easily handle their mortgage and can’t meet their savings and investing needs with TFSAs alone.

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Statistics Canada numbers show RRSP contributions grew by 2.6 per cent annually to $40.4-billion between 2005 and 2016, the most recent year for which there is data. This isn’t a mind-blowing number, but it’s much ahead of the average 1.7-per-cent inflation rate for that period.

The census of who’s actually contributing this money is where you see the real story in RRSP contribution patterns:

  • people aged 25 to 34 fell to 11 per cent of contributors in 2016 from 14 per cent in 2005;
  • 35- to 44-year-olds fell to 19 per cent from 26 per cent;
  • 45- to 54-year-olds fell to 28 per cent from 32 per cent;
  • 55- to 64-year-olds surged to 31 per cent from 23 per cent;
  • people 65 or older jumped to 9 per cent from 4 per cent.

Demographics help explain these changes. The boomer generation started retiring a few years ago and will continue to make this transition over the next 10 years. Well-established in their careers and their houses, boomers are directing their financial resources into retirement saving and picking up the slack left as the retreat of younger people weighs on some RRSP contribution numbers.

While total RRSP contributions rose steadily from 2005 to 2016, the total number of RRSP contributors shrank to 5.9 million from 6.1 million. Also, the median contribution was unchanged at $3,000 for 2013-16 and didn’t rise much in the preceding years.

Boomers are contributing to RRSPs avidly. Younger people, not so much. Joseph De Dominicis, vice-president and Ontario retirement leader for Morneau Shepell, said people in their 20s through early 40s may simply not have the money for RRSPs.

“They just have so many other competing priorities for their dollars – getting onto the property ladder, paying their mortgage,” he said.

TFSAs are also a factor in the retreat of younger adults from RRSPs. Introduced in 2009, TFSAs quickly built a following as an all-purpose saving and investing vehicle. You can save for a home down payment or keep a household emergency fund in a TFSA, or you can use it to invest for the long-term.

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Contribution to TFSAs are made with after-tax dollars and all withdrawals are considered tax-free. Contributing to an RRSP gets you a tax deduction, but the amount you withdraw from an RRSP is added to your income and thus taxable. These differences argue for using TFSAs over RRSPs in your younger working years.

The tax refund you get from an RRSP contribution early in your career could be far less than the tax hit on an RRSP withdrawal in retirement. The ideal contribution to an RRSP is made in a year when your income is higher than it will be in retirement. In other words, the peak career years that boomers are in right now.

A drawback with TFSAs is that there’s a maximum contribution of $6,000 a year, up from $5,500 last year and $5,000 when they were introduced. Even if people were to designate every dollar contributed to a TFSA for retirement, many wouldn’t save enough for the retirement they envision.

Will today’s young adults pivot to RRSPs later in life, as boomers have already? Morneau Shepell’s Mr. De Dominicis thinks so, but at a later age. “It will take people longer to get to a point where they have the disposable income to do it,” he said.

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