RRSP, it’s that time of year again!


At the start of each new year it begins: the over stimulating marketing campaign by nearly every financial institution that offers RRSP’s. In every possible media, such as emails, T.V. ads, billboards, and bus ads to name a few, we seem to hear about nothing else! Many of these institutions also state in one form or another that their system or family of products is the most appropriate for you… but what is the right answer? I can say from my personal experience of when I first stepped out into the working world: the bombardment is real and very confusing. We are presented with an alphabet soup: RRSP, GIC, TFSA or whatever the flavour of the month is, and everyone is expected to know all about these things. But for people who are hearing about this for the first time, or who aren’t financial advisors themselves, what do we do? Where do we go for advice?

When I started working and got my first bonus check, I did what my parents said to do: I went to my local bank branch, and dumped the money into an RRSP. Simple! Years later, that same default tactic is what many, many people run through, without much question. As more choices became available to Canadians, however, that tactic is no longer necessarily a very good idea.

Saving for retirement has changed

In the good old days, people didn’t need to worry so much since pretty much everyone had a pension at their work. Then as many companies’ traditional pensions disappeared, it was left up to us, the average Canadian citizen, to save for our own retirement. Registered Retirement Savings Plans were designed to allow Canadians to contribute to their plan and defer paying taxes on those funds to when they retire. Often they benefited even more, since their tax rate was higher while they were working than it was in retirement, meaning the tax deduction they received was worth more than the taxes they paid later on. Times have changed, however, as people nowadays are often still working well into their golden years. Some do it by choice since they do not want to just sit around being bored, but others cannot make ends meet and need to work. However, this extra income in “retirement” complicates matters: what if your retirement income falls into higher tax brackets than when the money was contributed? In that case it would have cost less to just pay the taxes while you were working, and put the money in a tax-free savings account instead, which would offer greater access to the money without tax penalties. The answer isn’t as clear-cut as it used to be.

Financial advice – from my experience

As a financial advisor with some experience behind me, I have discovered that the answer for many financial questions is often: it depends. There are advantages and disadvantages to all financial products. Clients need to understand that no product is right for everyone. As advisors, we need to ask in-depth questions to clients about many aspects of their lives and desires to find out what the right answer is for them at that point in time. We must also ask these same questions again regularly, to check if things have changed and if they are on track to their goals.

As a general rule, I recommend that clients don’t wait until this time of year (i.e.: the last minute) to decide how much they are going to put aside for their retirement. Instead, I advise them to save periodically throughout the year as part of a retirement plan. Not only does this limit the impact of trying to come up with a large sum in one shot, but it can also help some clients keep on track. The money gets invested soon after their pay goes in, so they don’t spend it. In the industry, we call this “paying yourself first”. Besides, could you imagine having to come up with one year’s worth of mortgage payments or car payments in one shot, especially right after the holidays? If that sounds crazy, ask yourself: are you doing that with your RRSPs?

Moving forward with financial literacy

Once people understand what is going on, and with a good advisor to guide them, they are better prepared and can properly make important financial decisions. A good analogy I have found is driving: what would happen if you get into a car without any experience or knowledge of the rules of the road, and try to drive? There could be some major life changing consequences! But with training and education, most people can learn to drive a car. The same is true with money: a little training and education can save you a lot of money and headaches in the future!

All Canadians should at least understand the products they are purchasing, with at least a basic understanding of their options and alternatives. This is one of the reasons why our firm set out to offer a set of basic financial literacy courses on some of the most important aspects of financial life. Our clients have reaped the rewards of that knowledge time and time again, but more certainly needs to be done! More people need to get this information: it is, after all, their family’s future at stake! Each week we help Canadians start making better decisions, and we’d like to invite you to be next!