RRSPs see shift in contributions

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This article was published 13/02/2024 (681 days ago), so information in it may no longer be current.

Last year saw a departure from the traditional RRSP season as Canadian investors moved away from concentrated contributions in January and February to regular savings.

Regular savings, in the context of RRSP contributions, refer to the practice of consistently allocating a set amount of funds frequently, such as every month. This approach contrasts with the traditional method of waiting until January or February to make a lump-sum contribution.

The shift, Westoba Financial Solutions’ financial planning director Rhonda Oakden said, indicates a positive change, reflecting a growing recognition among investors of the benefits associated with regular savings throughout the year.

“January and February were formerly known as ‘RSP season,’ as investors would rush to make their annual contribution early in the year,” Oakden told the Sun. “While we still see some do this, the industry has done a fabulous job at educating consumers on the importance of regular savings to their investment portfolios — RSP, TFSA or otherwise.”

She attributed the trend to automatic savings mechanisms that provide individuals with a more convenient way to save regularly and optimize opportunities for returns. The concept of an exclusive “investment season” confined to specific months has diminished, with people from all walks of life acknowledging the advantages of working with financial planners and incorporating regular savings into their financial plans.

As more and more people see the value of working with a financial planner, Oakden added, they are also coming to understand that regular saving has many benefits and is less stressful than last-minute contributions.

“The rush to make a lump sum deposit has decreased over the years as more and more take advantage of ‘dollar cost averaging’ into investments each month.”

Financial analyst Wale Adeniji agrees with Oakden and says implementing a consistent savings plan, like allocating $100 per month, is deemed a prudent strategy.

“This method is considered more manageable and less challenging compared to the task of accumulating a larger lump sum, such as $1,200, within a short period,” he said. “The advantage of regular savings lies in the early initiation of fund contributions.”

Regular savings, he said, also accelerate the growth of an individual’s retirement nest egg over time, since it not only eases the financial burden but also maximizes the opportunity for returns by starting the investment process earlier.

The trend follows the projection made by Edward Jones a year ago.

The investment company, in its study released in February 2023, found that 51 per cent of Canadians plan to contribute to their RRSP in 2023, marking a substantial 18 per cent point increase from the previous year.

The surge is particularly prominent among the 18-to-34 and 35-to-54 age groups, with 22 per cent and 23 per cent, respectively, more likely to contribute last year. Additionally, 23 per cent of contributors plan to utilize the maximum contribution amount.

Despite concerns about the cost of living being the most significant barrier to retirement savings for 51 per cent of respondents, the study found a considerable drop in the percentage of those unable to afford RRSP contributions, from 29 per cent to 16 per cent year-over-year. Income (19 per cent) and debts (14 per cent) were also cited as significant barriers.

“Intentions to contribute are at their highest level since the start of the pandemic, which is due in part to the Bank of Canada’s decision to increase interest rates,” Edward Jones’ Julie Petrera said. “Those rate hikes were designed to replace spending with saving, and our data demonstrates they are doing just that.”

As Canadians navigate economic uncertainties, Adeniji said, “this shift in RRSP contribution behaviour signifies a move towards a more thoughtful and strategic approach to financial planning, setting the stage for a redefined investment landscape in the years to come.”

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