RRSPs and strategies for long-term security

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This article was published 30/01/2024 (969 days ago), so information in it may no longer be current.

As Canadians navigate the complex landscape of retirement planning, the challenges associated with contributing to Registered Retirement Savings Plans have become more pronounced in the face of economic uncertainties.

Westoba Financial Solutions financial planning director Rhonda Oakden said the challenges hindering adequate contribution to an RRSP are not limited to the current economic climate, noting budgeting is the cornerstone of financial planning.

“Budgeting allows you to understand how much money you have saved, how much is coming in, and where it’s being allocated,” she said. “Earmarking a specified amount of money every month to savings is a good start. Build it into your budget and retirement plan.”

Emphasizing the importance of budgeting, Oakden said it is crucial to track spending to identify areas where seemingly small expenses may be eroding income. Nearly everyone has a guilty pleasure that could be reduced or eliminated over time to decrease debt and bolster savings. The advice remains: don’t neglect savings, even in the presence of existing debt.

Inflation, she said, has indeed presented a challenge, but it has also opened opportunities for investors. Canadians have experienced an extended period of low interest rates, potentially fostering a perception that these rates were “normal,” especially among younger borrowers.

“This has resulted in many individuals overlooking the potential impact of higher rates on debts such as mortgages,” she said. “The upcoming years may prove challenging as mortgages come up for renewal, requiring a potentially difficult adjustment to a ‘new normal’ if individuals are overextended.”

On the investment strategies to adapt for long-term security, the financial adviser said every situation is unique, pointing to the need for collaboration with a financial planner to tailor strategies to individual circumstances.

She says it’s important to maintain the discipline of “pay yourself first,” meaning save something before you spend, since this will help in assessing whether you’re on track to reach your goals.

“Depending on your life stage — early investor, a growing family or nearing a work-optional lifestyle — will determine if your overall strategy needs to be changed,” she said.

Like Oakden, World Financial Group’s Garth Duncan agrees several Canadians face challenges like reduced disposable income and higher mortgage payments and these deplete an RRSP’s contributions.

He underscores the importance of prioritizing debt repayment, especially in the current environment of rising interest rates. Duncan advises against unnecessary consumer spending, encouraging individuals to focus on debt reduction before embarking on significant retirement savings.

“I would encourage people not to put themselves in debt purchasing consumer goods that they don’t need,” he told the Sun. “For example, financing a new vehicle may not be a wise choice if they can choose more economical options like repairing the vehicle they have or buying a used vehicle.”

RRSPs, he said, may not be the best investment vehicle for all Canadians, noting the tax implications during retirement can offset the initial tax benefits.

“While people do receive a tax refund for investing in RRSPs when people take them out to spend in retirement, they need to declare this as income on their tax return and will consequently pay tax on every penny they’ve saved in the RRSP vehicle,” he said. “It makes more sense for people to invest in the Tax-Free Saving Account or the First Home Savings Account. Only (for) people that have maxed out these two options would it make sense to use the RRSP.”

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