It’s perhaps the greatest tax-planning tool available to Canadians, yet RRSPs still remains a mystery to some and are underutilized by many.
BMO’s 9th annual RRSP study digs into the data to examine Canadians’ RRSP contribution habits and highlight key trends.
Average amount held in RRSP
The study found that the average amount held in RRSP plans was $101,155 in 2018. This amount is up from $83,635 in 2016, which is great news given the market volatility we faced in late 2018 that has continued into this new year.
These amounts were broken down by generation, led of course by the Boomers who held an average of $178,664 in their RRSPs. Gen Xers held an average of $98,072 in their retirement accounts, while Millennials held an average of $28,821 in their RRSPs. (Interestingly, Millennials saw the largest percentage increase with 87 percent since 2016).
As a money blogger and financial voyeur I always like these surveys to compare where I’m at versus the average Canadian. I was born in 1979 – too old to be considered a Millennial but too young for Gen X (I think we’re called Xennials).
Looking at the survey data I’m happy to see my retirement savings as ‘above average’.
In 2017 I had an RRSP balance of $162,201 and had maxed out all of my unused contribution room. Last year I put in another $3,600 (maxing out my available room for the year) but markets were down and I ended the year with a balance of $162,939 – barely moving the needle forward.
Saving and Investing
Back to the BMO study, which found that 62 percent of Canadians have, or plan to, contribute to their 2018 RRSP, and those who have already contributed put in an average of $5,247.
More Canadians were putting money regularly into savings (60 percent), than into investments (36 percent). Is this a Canadian thing? Why are some of us content to hold cash in our retirement accounts rather than investing smartly into a globally diversified portfolio of ETFs?
Perhaps it’s due to the stock market correction we saw in the last quarter of 2018. The survey was conducted between November 30th and December 5th; smack dab in the middle of the mini market meltdown.
I’ve been there. I made a last minute RRSP contribution in February 2009 – you know, the bottom of the financial crisis – and thought the safest place for it was locked-in to a 5-year GIC. If I only knew then what I know now . . .
One other theory on saving versus investing in an RRSP is that some of us focus on making an RRSP contribution but then fail to invest that contribution to try and maximize long-term returns.
RRSP withdrawals before age 71
Another takeaway from the BMO RRSP study was that 34 percent had withdrawn funds from their RRSP account before age 71. While that number decreased 6 percent from last year, the amount withdrawn increased from $20,952 in 2017 to $25,779 in 2018.
The top reasons for RRSP withdrawals:
- Buy a home (28 percent)
- Pay for living expenses (24 percent)
- Pay off debts (20 percent)
- Early retirement (18 percent) <— Yassss!!
- Emergencies (15 percent)
The Home Buyers’ Plan is a legitimate program that allows you to withdraw up to $25,000 from your RRSP to buy or build a home for yourself.
You have to repay the funds starting in the second year after you withdraw them. If you don’t make the annual repayment then you must include that amount as RRSP income on your tax return.
Sadly, many Canadians who’ve participated in the Home Buyers’ Plan do not make the annual repayments to their RRSP.
That aligns with the survey data which showed that only 18 percent of those who’ve withdrawn from their RRSP have paid it back (a six percent decrease from 2017), while 15 percent believe they will pay back their RRSP within five years, and 59 percent don’t know when they will pay back their RRSP or don’t expect to pay it back at all.
It pains me to say this but I’ve withdrawn from my RRSP to pay off debt. This was back before the TFSA existed. I was making RRSP contributions at age 19 and 20, even though my annual earnings were well under $25,000.
I got into credit card debt and decided to withdraw from my RRSP to pay it off. That might have been the right decision at the time, but I’ll never get back that RRSP contribution room, plus I had to pay tax on the withdrawals (they’re treated as income).
Final thoughts and my RRSP takeaways
I know we’re in the middle of RRSP season where many Canadians will look to make a large lump sum contribution before the March 1st deadline. But I think a better savings strategy is to make smaller monthly contributions throughout the year. You’ll likely get to the same amount without having to scramble to come up with a large sum all at once.
In the RRSP study BMO linked to a savings calculator to help investors set a goal and then plan the regular contribution amounts, payment period, and frequency that will work best for the investor’s financial goals and aversion to risk. The key is making it automatic – set up a pre-authorized withdrawal to come out of your chequing account and go into your savings or investing account on the day you get paid.
- Make sure to invest your tax refund to supercharge your RRSP savings.
- Invest your RRSP contribution in a GIC, mutual fund, or ETF – don’t just leave it in cash.
- Resist the urge to raid your RRSP to pay for living expenses. Your future self will thank you.
- Online investing is another way to invest in an RRSP –whether on your own with BMO InvestorLine Self-Directed, with advice from BMO adviceDirect or the robo advisor route with BMO SmartFolio. There’s also the option of getting help from an investment professional at a BMO branch.
Finally, determine whether the RRSP or TFSA is a better fit for your retirement savings. Most of us can’t afford to max out both, so we need to pick the most optimal savings vehicle for our own situation.
The rule of thumb is if you expect to make less in retirement than you do today, go with the RRSP. If you expect to make more in retirement than you do today (i.e. entry level salary) then go with the TFSA.
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