With the end of the Registered Retirement Savings Plan (RRSP) season looming on March 1st this year, most people are making last minute RRSP contributions, often not thought provoked, to try and recoup some of the taxes they have already remitted to the CRA. I have said many times that I do not like RRSP season. It us mostly sales focused and stands in place of a planned RRSP funding regime developed with your Financial Life Planner.
So, at this time of year, we are encountering most people with underfunded RRSPs and no continued funding strategy. Many have large contribution rooms. Of course, the first thing is to determine what the best RRSP strategy is for each individual or family. Each is unique. That said, the question does arise on the best way to optimize the unused contribution room. For some, retirement is looming and their RRSP savings look a little thin. So what can you do to build them them up?
As I said, there’s no single solution since everyone’s finances, lifestyle needs and wants, and retirement dates are different, but some math mixed with the right saving and investing strategies can help many people get on track.
Getting clear on where you’re starting from is really important. What kind of retirement do you want and how much might that cost per year? You can go through the exercise of how much are you spending now and how that might look different after retirement. The caution is that the closer you are to retirement, the fewer options there are to make up a savings gap. If you’re only two or three years away, making money and saving as much as possible is even more important.
It’s also important to remember that retirement can last three decades or more, given longer lifespans and depending on when you stop working. If you’re just looking at a bank account and you have a couple of hundred thousand dollars or a million, it seems like a lot. But if you live a lavish lifestyle, and factor longevity into retirement, that money has to last a very long time.
Advisors are often relied on to help people plan for retirement, whatever that looks like for them, and stay consistent with those goals. We use specialized software to calculate how much income a particular person needs each month or year to meet their retirement goals, and how much will be provided by pensions or investment income. The federal government also provides an online retirement income calculator that includes Canada Pension Plan and Old Age Security income considerations.
Generally, there are three options with clients looking to ramp up their retirement plans. You can increase your monthly savings, insert a lump sum into your retirement planning right now and with investment growth it would be calculated to get you there. Or you could delay retirement.
Speeding up savings often requires a lifestyle shift. The good news for some is that the pandemic lockdowns have helped them save more by being stuck close to home. Maybe you can leverage the extra income right now. It’s about doing what you can when you can.
People should consider needs versus wants if they’re trying to save more. That can be a challenge for some. Consider whether you need five streaming services or the newest smart phone every two years. Maybe you don’t need to replace your car so often.
More thought should also be put into what vehicles are used for retirement savings. For example, the choice between a RRSP or a Tax-Free Savings Account (TFSA) can be important. Contributions to an RRSP provide a tax break but trigger a tax bill when they are later withdrawn. TFSAs, on the other hand, provide no contribution tax break but don’t trigger tax when withdrawn. If you’re a bit older and have more taxable income, maybe you need to do the RRSP first and then the TFSA. That decision should be made year to year.
People approaching retirement also need to look carefully at their investments. What are you investing in? What is a reasonable estimation of the rate of return on those investments? The rate of return becomes a lot more important when time is missing. Investors should also consider how much risk they can stomach if they’re investing to produce higher returns for retirement. It’s going to cause tremendous stress if market correction or volatility is going to cause a looming retirement problem.
Homeowners who are eyeing the equity in their house as a solution to the savings gap should also be cautious. Some may have a house and cottage and decide to sell the house to retire to the cottage. Or some may want to be snowbirds or travel, and plan to sell and then rent instead. You can find a windfall that can put you over the edge. But I never recommend people do it as their only option.
Retirees who sell their homes may discover they don’t love renting. You have to consider mental well-being. You have to keep the softer side of retirement at the heart of the discussion.
For those who just can’t make the math work to close the savings gap in time for the planned retirement date, the option is working longer or planning on part-time or consulting work after retirement. It’s not necessarily a negative; many people choose to work longer even if they’ve saved enough. Just because you’re 60 doesn’t mean you have to quit working and not continue saving.
No matter what the retirement plan is, advisors stress that it shouldn’t be set in stone. Plans often need to be revisited regularly to consider changing economic, market and lifestyle circumstances. That is the key aspect behind planning your savings for retirement. Its not just adopt a lump sum deposit at year end or getting a RRSP loan to do so. It requires continual planning, review of that plan as your circumstances change, and staying ahead of the curve and Keeping Life Current.
