While Canadians are increasingly taking advantage of the tax-deferred benefits offered by RRSPs, they may be contributing more to their plans than they can actually afford, according to research from two financial institutions in the country.
A study by Scotiabank found that almost a quarter of Canadians have tapped into their retirement savings for one reason or another. While the main reason was to finance a home purchase, with 8% using the Homebuyers Plan, what’s more concerning is that 6% said they took withdrawals from their RRSP to cover “everyday living expenses.”
“Meeting everyday commitments should not come at the expense of future profits. Canadians must strike a balance between meeting their everyday financial needs and planning for the long term,” said Howard Kabot, national director of financial planning at Scotiabank. “Withdrawing money from an RRSP should always be a last resort because the funds will ultimately be taxed at the investor’s highest marginal rate.”
Kabot says using credit is a smarter option, especially in the form of a line of credit, which generally carries lower interest rates than credit cards. This may prove problematic for some, as paying off debt was the third most common reason for leaving an RRSP (4% of respondents).
Only 1% of respondents said they had withdrawn cash through the Lifelong Learning Plan, which is similar to the Home Buyers Plan in that the amount must be repaid to the RRSP within 15 years. Failure to do so results in an interest penalty and taxation of the amount withdrawn. However, of those who took advantage of these two programs, one in five said they did not plan to repay the amount.
“Even if you take money from your RRSP that you can’t repay, individuals should try to make up for it by maximizing their RRSP contributions in the future,” Kabot said. “This will help maintain the value of your retirement savings over the long term.”
The study also found that baby boomers were less likely to have their nest eggs raided than those outside their demographic. Only 19% of respondents aged 39 to 58 said they had withdrawn cash, compared with 27% of respondents older or younger.
This sounds logical because older non-baby boomers could withdraw cash to fund their retirement, but the study found that only 3% of the non-boomer group converted their RRSP to an RRIF.
The Scotiabank survey also examined what investors hold in their RRSPs and found that it consists of 57% mutual funds, 30% GICs and 26% direct stock holdings.
A separate study by Desjardins Financial Security found that 59% of Canadians over the age of 40 have a plan to fund their retirement. If that sounds too low, there’s more bad news: The study also found that half of people who had a plan weren’t able to stick to it.
“We know that when people take the time to develop a retirement savings plan, about half of them will implement it fully,” said Monique Tremblay, senior vice president of savings and segregated funds at Desjardins Financial Security. “We are more concerned about the other half of the group – those who only partially follow through on their plans and those who do not follow through at all.”
Part of the problem may be that many Canadians prefer do-it-yourself investing, with a third of respondents saying they managed their own retirement investments. Only 45% of retirees and 50% of working Canadians chose to seek professional financial advice, and only 12% said they completely relied on the advice they received. 9% of retirees and 16% of workers cited friends and family as helping them develop a plan. Ten percent said they had no method for managing their retirement savings.
“What matters is getting to the planning phase, but that’s only half the battle. There is a clear lack of follow-up,” said Monique Tremblay, senior vice president of savings and segregated funds at Desjardins Financial Security. “It’s comparable to planning an entire vacation and then deliberately missing the boat and, more likely than not, ending up with no vacation at the end of the day.”
Submitted by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com
(19/01/06)
