Tag Archives: RSPs

Do RSPs Still Make Sense?

For most people they still do.That’s the short answer, but it is well worth reviewing your overall retirement strategy and the role that RSPs play in your financial decision-making.

So what are your neighbours doing about RSPs?
It’s true that lots of them are shying away from investing in RSPs citing disappointing markets, big mortgage payments and newer TFSA options. Statistics Canada reports that 88% of tax filers were eligible to contribute to an RRSP in 2007, but only 27% actually made contributions. They only used 7% of the total contribution room available to them and there is now almost $500 billion in unused RRSP contributions being carried forward. The median RSP contribution was only $2700.

Some advisors recommend paying down your mortgage before investing in RSPs. I disagree. The problem with this strategy is that with large mortgages and longer amortization periods, by the time the debt is paid off, there is limited time to save for the income needed in retirement.

A paid off mortgage is great, as it means lower expenses in retirement, but you still need income to cover the rest of your retirement expenses. So, unless you plan to sell your home or significantly downsize in retirement, you still need to save and invest.

RSPs still almost always make good sense if:

  • You are under 50 with 10-15 years left before retirement
  • You have less than $200K invested in RSPs to date
  • You are in the highest tax bracket now
  • You pay less than 6% on your mortgage
  • You have a balanced portfolio of conservative stocks, bonds and cash investments in your RSP

Here’s what I recommend:

  1. Set up a plan to be debt-free before retirement – preferably 5 years before the big day.
  2. Invest monthly in your RSP especially if your income is higher than $40K.  If your income is less than $40,000, use a Tax-Free Savings Account (TFSA) instead. You can always move the money to an RSP later if your income increases.
  3. Take the time now to figure out your investment game plan. Decide on the optimal mix of equities, fixed income and cash to meet your specific needs and risk profile. (Note: Choosing the right asset mix is far more important than what investments you actually select. Most people spend time on the wrong things here.)
  4. If you’re a “do it yourself investor”, then use low-cost mutual funds or index funds (Hot Tip: Check out Investor’s Aid Coop).
  5. Otherwise use an advisor that provides “value-added” financial planning advice. Ask questions to make sure you are getting the advice you are paying for. (check out: Questions to Ask your Financial Advisor).
  6. If you don’t feel you can pay down your mortgage and contribute to your RSP, then review your cash flow and reallocate your resources so you can. Sure you might have to give up some good stuff today, but you’ll thank me at retirement!

Since most people think twice about withdrawing money from an RSP before retirement, topping up your RSP will help ensure you have some savings when you retire, even if you do have to pay some tax. Just do it! – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

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Post Recession Check-in – Are you keeping up with the Jones?

The much hyped “Great Recession” seems to have lost much of its steam with more and more prognosticators announcing its end, or, at least, its imminent demise. The debate amongst economists and politicians will likely go on for some time about how bad it really was, but chances are some new flu epidemic, or other news event will soon capture the headlines and the recession will soon fade from our collective memory. But should it?

The big question is whether or not we learned anything from the past year. Remember the fear, the doubts, the insecurities?  Were the promises to save more, spend and invest more prudently, plan better, get out of debt, all a waste of time?  Do we now blithely go about our business with a continuing binge of unsustainable spending and indebtedness that impoverishes us both financially and spiritually?

I recently came across a report from the Vanier Institute of the Family called, The Current State of Canadian Family Finances, by Roger Sauve that reinforced my concern that the average Canadian is not out of the woods with more pain to come.

Here’s where “the Jones” are at:

Net worth:

  • The average household net worth is now $393,000 –up from $240K in 1990
  • This increase is largely due to real estate growth

Income and Spending:

  • The Good News: Average income is $65,000 — up 11.6% since 1990
  • The Bad News – Spending increased twice as fast (up 24%)
  • More bad news: Debt increased more than 6 times faster than income (up 71%)

Savings:

  • We save 3% of our disposable income in Canada. (This compares to 1% in the USA, and 10%+ in France, Germany & Australia.)
  • Only 27% of Canadian tax filers contribute to RSPs in 2008

Debt:

  • Average household debt is $90,000
  • The ratio of consumer and mortgage debt to disposable income is at 127%. This is just marginally lower than the USA (and exactly the same as in the USA in 2006 just before the US housing bubble burst)
  • About 50% of people with incomes between $30,000-$80,000 struggle to keep debt under control
  • Insolvencies are expect to be around $120,000+ in 2009 — almost 3 times the number in 1990
  • The number of insolvencies in the 55+ age group are climbing fast than in other age brackets
  • The #1 reason for insolvencies in the over 55 group? Overextension of credit

Credit cards:

  • There are more than 64 million Visa and MasterCards in circulation. Canadians hold an average of 2.6 cards each
  • The number of credit cards transactions increased by 60% from 2002-2007, with debit card usage only going up 15%, and cheque writing declining by 15%.

Tough news is never what we want to hear.  As Canadians we really need to take a hard look at how we spend, save and use debt.  And despite what we might like to believe, we’re not much better than the US when it comes to savings and debt.

Guess these days keeping up with our neighbours isn’t so great after all. – Karin Mizgala

Karin Mizgala is a Vancouver-based fee-only financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.

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