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It's Your Money  

RRSP deadline today

Ok, last one I promise.

I’ve already written two columns on RRSPs in the last month and I was really wondering if it made any sense to talk about them one more time.

But so much misinformation still exists about this program so here we are…

Surprisingly, after 60 years of existence, the RRSP program is still widely misunderstood and many common myths persist.

In the past few years, we’ve seen an increase in commentary surrounding the lack of benefits of RRSPs and we’re seeing more Canadians eschew RRSP contributions in favour of TFSAs.

For some people, the TFSA program may make more sense, but many others should not be avoiding RRSP accounts simply because they don’t understand them or get bad advice.

Let’s look at the three biggest myths and the reasons why Canadians are avoiding RRSP plans:

Myth No. 1

A recent poll showed 39% of Canadians believe that RRSPs are pointless because you’ll pay back all the savings in taxes anyways.

Although you do pay taxes on RRSP withdrawals, most investors will pay less tax and end up farther ahead by putting this money into an RRSP since their income in retirement will be less than while they’re working.

Even if you pay the same tax rate during retirement as you do while working, your “worst case” is getting the same net amount as you would with a TFSA so you’d get a similar tax-free rate of return.

All other things being equal, an RRSP contribution is typically better than a TFSA one (better = you’ll have more money net in your pocket in retirement) if you’re income will be lower during retirement.

RRSP vs TFSA will be a wash if you expect to be in the same tax bracket during retirement and the TFSA option will generally win out if your income is expected to be higher.

One big catch is what you do with the tax refund you receive after making the RRSP contribution – if you re-invest the refund into the RRSP you end up taking full advantage of the program’s features, but if you use the refund to go on a shopping spree, you’re really missing the point.

Myth No. 2

Many people feel that they don’t have enough money left at the end of the year to put some aside in an RRSP. While balancing a budget is certainly challenging, you really can’t afford to NOT put money away.

A certified financial planner (CFP) professional can help analyze your budget and find out what areas can be trimmed or cut to make space for retirement savings.

While paying off debt is often at the top of the priority list for many Canadians, doing so in place of saving for retirement doesn’t always make sense.

High interest debt such as credit cards should take priority but neglecting your retirement savings in favour of paying extra onto a mortgage is usually the wrong move.

Likewise, money being allocated to items like RESPs (education funds) for your kids might seem like the right thing to do but those funds should often be diverted to RRSP accounts instead if you’re unable to do both.

Myth No. 3

There is an un-warranted concern by many of saving too much money in an RRSP since they fear a large tax bill when they die.

While the market value of your RRSP or RRIF does in fact need to be included as income on your terminal tax return, there are numerous exceptions.

Your RRSP value can potentially be rolled over to a surviving spouse, a financially dependent child or grandchild or an RDSP (disability) savings plan.

More likely, you will draw down on your RRSP values over many years of retirement anyways.

The deadline to contribute to an RRSP and get the credit for the 2020 tax year is today.

It is not too late to put that contribution in.



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Virus changing retirement

Canadians are rethinking their approach to retirement planning as a result of the COVID-19 pandemic. While a global pandemic is certainly not a great catalyst, it is encouraging to see more Canadians starting to make this a priority.

According to a study by IG Wealth Management release last week, which was conducted by Pollara Strategic Insights on behalf of IG, almost half of Canadians who are not retired say the pandemic has made them rethink what their retirement will look like, and how they will get there. A bit of a silver lining in my eyes.

The study also found that:

  • 63% report that they would now prefer to spend their retirement in their own home, rather than a retirement facility.
  • Half say the pandemic has made them prioritize being closer to family and remaining in Canada, rather than living abroad.
  • one-third of Canadians who are not retired feel the pandemic will cause them to delay their retirement.

“It’s understandable that the events of the past year have caused many Canadians to pause and re-think what their futures will look like, including their plans for retirement,” said Damon Murchison, president and CEO of IG Wealth Management.

“Whether it’s staying in your current home for longer or re-evaluating how much healthcare coverage might be needed, these changing priorities can have a significant impact on your finances.

"This makes it all the more important to have a financial plan in place that includes a robust retirement component. And, perhaps just as critically, one that can evolve and be adapted to reflect your changing priorities.”

The study also revealed that most (88%) of working Canadians reported being uncertain about the amount of money they will need during their retirement to cover expenses and to last as long as they do. Other key findings from the study include:

  • 67% now see a greater need for an emergency fund, both now and in retirement.
  • Half of Canadians are now considering getting their estate plans in order before they retire.
  • Two-fifths are thinking about the amount of healthcare coverage they will need in retirement.
  • 46% believe they might need more money in retirement than they had originally thought.

These are all items that a financial plan will address. None of these are new issues that did not exist in pre-pandemic, it is really more a story of people who have previously “put off” dealing with them are now realizing that they can’t do so any longer.

A proper financial plan will detail exactly where you are today, where you’d like to be in the future, and provide a detailed roadmap of how to get there.

That plan needs to be updated regularly as your situation changes and tested against a variety of what-if scenarios to make sure it will hold up if the market drops, you live longer than expected, inflation spikes, or any number of other variables occur.

If you can take one positive out of our current world situation, use this time as a reason to get your own financial plan started or properly updated.



Insure your spouse

Do you have insurance on your car?

I don’t mean the basic liability insurance that is required by law but instead the additional optional collision insurance that will repair or replace your vehicle if it is damaged.

My bet is that if your car is worth more than $10,000 you probably do. And why wouldn’t you?

Can you imagine the financial hit your family would take if your brand new $30,000 or more care was wrecked and you were left on the hook?

What does that collision insurance cost you on an annual basis? Let’s assume a median age, vehicle price and driving history and estimate it will cost you around $600 a year for the collision portion of your car insurance.

People will happily pay this $600 each year to insure the risk of losing a portion or the entire value of their car. Something that according to my rough calculations with ICBC statistics, you have a one in three per cent chance of claiming on in a given year.

Let’s switch gears and consider the financial burden to your family if your spouse passes away. Your spouse earns $80,000 per year and ignoring inflation, let’s assume they will earn that same amount for the next 15 years until they retire.

Your family relies on that income to survive and 15 years of $80,000 equals $1.2 million. Have you really stopped to consider what would happen if your spouse doesn’t earn that money over the next 15 years?

A 45-year-old in Canada has a four to five per cent chance of dying prematurely.

To insure this risk, a $1 million, 10-year-term life insurance policy on a 45-year-old male would cost as little as $980 per year and a 45-year-old female’s plan would only cost around $670 per year.

Yet, there are many Canadians who don’t have life insurance.

Let that sink in for a minute, there are far more Canadians paying $600 per year to insure a $30-50,000 risk of losing their car than there are willing to pay $600-1,000 per year to insure a $1 million loss…

Quite simply, it doesn’t make any sense. So why are so many people avoiding life insurance?

The most common reasons are a lack of understanding, feeling that they don’t have time to set it up and the fear of a complex underwriting process to get approved.

Well one little piece of good news in this pandemic is that insurance companies have made some major (but temporary) changes to their application process.

The entire process can now be done digitally and can be done in very little time. Furthermore, most major insurers are waiving medical underwriting requirements for a limited time as they are avoiding any in-person contact.

If you have collision insurance on your vehicle, but no life insurance on your spouse, take a moment to consider just how absurd that notion is and take advantage of the temporary relaxed underwriting requirements that exist in the marketplace today.





Top RRSP mistakes

The deadline for contributing to an RRSP account for the 2020 tax year is coming up in a few more weeks on March 1.

The RRSP program has been around since 1957, yet there are still many people who don’t fully understand it.

Further, there are plenty of Canadians who are still making the same RRSP mistakes each year. For this week’s column, I figured I’d discuss the top 10 RRSP mistakes and how to avoid them:

Over contributing

There are limits on how much you can put into an RRSP. If you don’t have a company pension, it’s 18% of what you earned in the previous year up to a maximum ($27,830 for 2021).

Those with a pension typically have significantly less room and an over contribution can occur quite easily.

Rushing to make a contribution

Many people wait until the last few days to put money in and don’t have the time to sit down with their advisor of financial planner to select the right investment.

If you’re rushed, there is nothing wrong with putting the money into your RRSP in cash and selecting the appropriate investments at a later date.

Doing a lump sum contribution each year

Aside from being rushed, you’d be better off contributing monthly instead of doing a lump sum before the deadline anyway.

Doing so allows the investments to be purchased at a variety of price points and typically reduces the risk.

Starting too late

The earlier people start squirrelling away money for retirement the better. I understand it can be hard for many to start saving early but even a small amount each month is better than nothing.

Being too conservative

I get it, nobody likes to lose money. But if your RRSP is conservatively invested and you have 10 or more years until retirement you are really missing out on the power of compounding growth. Put them in the market and stay invested through the volatile times.

Withdrawing from your RRSP early

Taking money out of your RRSP before retirement will not only trigger extra taxable income on top of the income you’ve already earned that year, but it will also have serious consequences to your retirement plans.

Forgetting to name your beneficiary

One of the many benefits of the RRSP program is to name a beneficiary and in certain situations, have the money bypass your estate and defer the taxes.

But all too often, people forget to name one, name the wrong person, or forget to change the beneficiary when their spouse passes away.

Holding RRSP accounts at multiple institutions

Doing so will almost always end up with the investor paying more fees than necessary and it also makes it harder to achieve the proper asset mix and diversification.

Holding the wrong investments

Proper planning dictates which types of investments should be held in an RRSP, TFSA or a Non-Registered account. All too often people end up holding the same investments in each type of account which can be cause unnecessary extra taxation.

Failing to revisit your plan

While I do suggest putting money into equities and not being tempted to pull it out, you still can’t ignore your plan entirely. Regularly reviewing and updating your financial plan that includes your RRSP and other accounts is important to reaching your goals.

While not everyone will have money to put into their RRSPs this year, those that can should really try to do so.

Just be sure to get proper advice from a qualified financial planning professional to help avoid the above mistakes!



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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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