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.
Other thoughts:
- 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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Robo-advisors have been around for several years now offering affordable online investing services with an element of human advice. In general, investors who use a robo-advisor get assigned to a pre-packaged portfolio of low-cost exchange-traded funds (ETFs) based on their risk tolerance. Portfolios are regularly monitored and re-balanced whenever a client’s asset allocation drifts away from its original target.
The arrival of these digital platforms coincided with a period of strong stock market returns and new clients were keen to join the robo-advisor revolution. Fledgling start-ups like Wealthsimple, Nest Wealth, and others were quickly joined by big bank offerings such as BMO SmartFolio and RBC Invest Ease.
How will robo-advisors hold up in a market downturn?
There’s an old adage that “a rising tide lifts all boats” and so while clients might have been thrilled with healthy returns and lower fees over the past few years, it’s fair to wonder how robo-advisors, and their clients, will hold up during a market downturn.
Indeed, the stock market decline last quarter had many investors fearing a prolonged downturn or a crash. When that happens, says Randy Cass, founder of Nest Wealth, investors start looking for something better elsewhere.
“Investors who use a digital advisor are no different than investors who use a traditional advisor,” says Cass, who adds that the timing of investors changing advisors or switching platforms is highly correlated with negative market performance.
Millennial investors, many of whom have never seen a bear market in their investing lifetime, may be particularly vulnerable to irrational behaviour during volatile markets.
This type of investor might be logging into his or her account more frequently when stock markets are down. Robo-advisors leverage technology to identify nervous investors who fall into a category of behaviour deemed to be ‘abnormal’ and then present messaging to them online or via email reminding the investor of their long-term time horizon and risk tolerance.
“We’ll remind clients that during the on-boarding process we said this type of portfolio might see drawdowns of 10 per cent or more in the short term and that this market volatility is perfectly normal,” says Cass.
Most robo-advisors operate under the philosophy that it’s better to build a diversified portfolio that tracks the global markets for a small fee rather than try to beat the market through active management (stock picking and market timing), which tends to cost more.
That means the type of investor attracted to a robo-advisor knows they can’t control what markets do in any given month, quarter, or year, and should be prepared to accept whatever the market delivers.
It’s that philosophy that has Dan Tersigni, a portfolio manager at Wealthsimple, thinking that digital services are actually really well-positioned to guide clients through market volatility.
“We’ve set a different expectation than a lot of the industry does — outperforming the market is not part of our value proposition,” says Tergigni.
Instead their promise to clients is to set them up with a diversified portfolio designed to meet their goals, be transparent, and keep fees low.
“We can’t control the market, and neither can they, but we can help keep them on track and informed,” he says.
Meanwhile, traditional financial advisors have been under pressure to offer more than just their stock picking prowess. Low cost index investing solutions (like robo-advisors) have commoditized investment advice, but the value of human advice has always been psychological – helping clients stick to their plan during turbulent times and preventing a panic induced mistake.
There’s a perception that robo-advisors don’t have the human communication capability of a traditional advisor. But robo-advisors can get a message out to their clients much more quickly than a traditional advisor through their product platform and via email and text message.
“When something unusual happens in the market, all our clients have a message from us within hours explaining what’s happened in simple, human terms and encouraging them to stay calm and stick to plan,” says Tergigni.
Interestingly, clients receive similar messaging in good times and bad. When markets were seeing record highs, Wealthsimple sent a message to its clients telling them not to rely on it or to chase bigger returns.
While it’s true that robo-advisors remain untested in a prolonged bear market, by leveraging technology with behavioural psychology they can quickly calm nervous investors and prevent panic.
This week my wife and I finally tried online grocery shopping and home delivery. What a game changer!
We shop bi-weekly at Costco for the majority of our groceries and household supplies. In between it’s a mix of No Frills, Safeway, and Save-On Foods for fresh produce and other items we seem to need regularly throughout the week.
It’s a pain to shop at multiple stores around the city, not to mention the time wasted shopping and waiting in line. We’ve noticed the Save-On Foods grocery delivery van in our neighbourhood and decided to give online grocery shopping a try.
Ordering from the website was fairly straightforward. We navigated the categories just like we’d move through the store – produce, bakery, meat, and dairy – plus all of our favourite staples.
We added it all to our online shopping cart and then selected a delivery time slot. The total order came to just under $100 (the minimum order is $45). As a first time home delivery customer Save-On Foods waived the $5 delivery fee. They even threw in a free chocolate bar.
We selected next day delivery between 4 – 6 p.m. The driver called that day at around 4 p.m. and said he’d be at our house in 15 minutes. He came to the door and delivered the groceries along with a detailed receipt that explained why a couple of items that we ordered were substituted for something similar (a bag of three avocados subbed for three loose ones, for example).
One thing we were concerned about is whether they’d select the “nicer” produce for us. They did!
Our only complaint, and this is more of a learning curve for us, is that most of the produce is ordered by weight instead of quantity. I have no idea how many grams of bananas we needed, but at least now I know that 100 grams will get you one banana :/
We’re definitely going to do more online grocery shopping as a way to save time and maybe even some money. We’re also keenly interested in Costco’s 2-day grocery delivery – which is currently only available in Toronto and southern Ontario.
It gives me a warm feeling just thinking about never setting foot inside a Costco again – especially on a Saturday!
This Week’s Recap:
It’s RRSP season and on Monday I wrote the beginner’s guide to RRSPs.
And on Thursday I explained why contributing to your RRSP is just the first step.
Over on Rewards Cards Canada I revealed exactly how I redeemed more than 1 million points for travel.
Weekend Reading:
The Financial Consumer Agency of Canada released a study on home equity lines of credit that paints a damning picture of consumer knowledge and use of this product. Of note:
- Most respondents scored less than 50% on their knowledge of HELOC terms and conditions
- More than any other age groups, 25-34 year olds said they:
- made interest-only payments on their HELOC
- often used HELOCs to meet payments on their other debt
- would struggle if their payment increased by $100 per month
Preet Banerjee explains why for much of the world, retirement’s golden rule of ‘pay yourself first’ doesn’t apply.
Banerjee and a team of researchers also looked at how financial services innovation is leaving too many Canadians behind:
Those among us who do embrace these new innovations can also fall into other traps: Easy access to online brokerage accounts increases the likelihood that people trade too frequently, hurting long-terms returns. Easier access to credit via innovative online lending businesses is trapping many into a cycle of high-interest loan use to fund day-to-day expenses.
Here’s the 10 smartest things said about investing by Vanguard founder Jack Bogle.
Michael James shares an honest look at his investment returns for 2018. Despite a modest loss, he won’t be firing his advisor or moving to cash.
Million Dollar Journey blogger Frugal Trader updates his family RESP portfolio for 2019. I love these updates as his kids are a couple of years older than mine and we use the same TD e-Series portfolio.
Newlywed Des Odjick explains how she and her husband manage their money now that they’re married. My wife and I have a joint chequing account that pays all the bills, plus she has her own no-fee chequing and savings accounts.
Gen Y Money shares the ins and outs of pension buy backs and explains why she didn’t buy back years of service on her pension.
Speaking of pensions, Mark Seed does an in-depth review of the book, Pensionize Your Nest Egg by Moshe Milevsky and Alexandra Macqueen. The premise is to take a portion of your retirement savings and purchase a life annuity.
Here’s Jason Heath on getting the most out of retirement income planning with an older spouse.
Finally, an excellent post from a retiree-researcher-computer-geek who helps unwealthy retirees. Honey, what’s our retirement plan?