5 Reasons RRSPs May Not Be What You ThinkSubmitted by MacDev Financial Group on January 31st, 2019
Guest Post by Valentin Bradu, Life Insurance Broker/ Bank On Yourself Authorized Advisor with MacDev & SET Financial
The "Maximize Your RRSPs" campaigns directed at Canadian consumers have started and will continue for the rest of this month prior to the RRSP contribution deadline of March 1, 2019. Most of us have been conditioned by the financial industry to think RRSPs (Registered Retirement Savings Plan) are our primary vehicle for retirement savings. During this month, many Canadians will be scraping funds together to put in their RRSPs so they can get a tax break. However, below are five reasons why RRSPs may not be as ideal for retirement planning as you might think.
Reason 1: RRSPs were never designed to be your main retirement vehicle
RRSPs were designed to be the third leg of a three-legged stool retirement plan.
· First leg – the Employer (Defined Benefit) pension plan,
· Second leg – the government pension plan (CPP, OAS and equivalent) and finally,
· Third leg - RRSPs which were designed to supplement the first two legs.
However, with many companies/employers eliminating and closing their pension plans, or establishing RRSP employee-matching programs instead, RRSPs have now become the main leg of a shaky two-legged stool.
Reason 2: RRSPs are aggressively marketed to Canadians on one financial aspect alone: Taxation
I believe it is unprofessional to recommend a financial product to anyone based primarily on taxation alone. On top of that, even if you objectively consider the taxation premise on which RRSPs are sold, you will find that the premise is based on a lot of assumptions and parameters beyond your control!
RRSPs are structured and marketed under the following premise: save (defer) income taxes now and pay them in retirement, when you will be in a lower tax bracket – ergo, you saved on taxes.
However, who knows what your tax bracket will be 20, 30, or even 40 years from now? Do you think the tax level is going to stay the same over that time span? Even assuming the tax brackets stay unchanged for that huge time span, and assuming you will make money in your RRSPs, you will end up paying taxes on a larger pool of money (the principle of paying tax on the harvest instead of paying tax on the seed). Does that make sense to you?
Also, worth mentioning, should a taxpayer die—and there is no surviving spouse, the entire balance of the investments in their RRSP account is deemed to have been sold in the year of the final tax return and it is very likely that most of it would be taxed at the maximum or marginal tax rate! What is the highest marginal tax rate in your province? What would your estate pay? For many, it could mean losing almost half of the retirement fund balance!
Do any of us want to live on less money in retirement than we did in the last five to 10 years before retirement? Translation, do you want to be poorer in retirement? Of course not.
Your advisor should take a holistic approach, looking at the whole financial picture when designing a comprehensive financial strategy: your income, consumer debt, employer pension plan, CPP, OAS, mortgage debt, insurance situation, and many other parameters that affect your financial outlook and future.
Reason 3: Investing only in RRSPs can be risky business for retirement savings
Investing only in a RRSP can be a risky business when it comes to saving for retirement because you’re not always guaranteed a return. Depending on the way your RRSP is diversified and invested, you stand to lose any gains and more in a shaky and unpredictable stock market. Since 2000, the stock market has experienced losses of 49%+ from two separate crashes.
I never get tired of saying it: INVESTING is not SAVING! Investing is taking on risk and volatility where you can lose money, regardless of your risk tolerance. We are often taught that saving money is not growing our money. However, saving is growing your money, protecting your money from loss, and eliminating unnecessary risk.
While investing has its role in a holistic financial plan, I do not believe savings, like your retirement plan, should be part of the stock market rollercoaster when better, safer, and more secure savings options are available to you, that shelter your hard-earned money and provide guaranteed returns.
Reason 4: RRSP growth is assessed by average rate of return rather than looking at magnitude of return
Conventional financial planning looks at the productivity and growth of your RRSP based on your yearly average rate of return; that is how your money grows year-after-year. If you look at the chart below, you will see that the ups and down of a turbulent stock market year-after-year has a huge impact in the overall size of your returns over time.
When focusing primarily on the average rate of return, you’re not realizing you could be losing thousands of dollars, to millions for some, in the difference of the balance of your retirement account. When it comes to assessing the performance of returns on your RRSP account, you need to focus on the actual magnitude of return: the growth of your money the day you need it or pull it out. In the chart below, the magnitude of the return would be ZERO. You wouldn't have made anything.
Reason 5: You pay management fees on your RRSP account, even when you lose money
Even when investors know that, with few exceptions, they are paying a management fee (and other fees) for their investments, very investors understand the effect of fees on their retirement account balance. Investors generally pay a 1-2% (sometimes more) “management fee” applied to the entire balance of their investment account. This is true regardless if, in any given year, your investments made money, lost money or stayed p
· If you had a $250,000 RRSP that made no money but didn’t lose any either, your would still pay $2,500 to $5,000 (or more) in management fees.
That 1-2 % looks small when you look at one year alone, however, when you consider the cumulative effect of the fees you pay over the life span of your investment, you will learn that those fees could eat up a fair bit of your account balance over the years. Take a look at your statements and add up the management fees for each year. Are you even making enough in returns to pay that fee?
There are other retirement savings products on the market more powerful than RRSPs when it comes to planning for your retirement, such as participating whole life insurance and segregated funds.
Participating whole life insurance not only offers you insurance protection and a tax-free death benefit, but a cash value. This cash value is a supercharged asset that allows you to build equity year-over-year through guaranteed returns and potential dividend earnings. A participating whole life insurance policy as a retirement savings vehicle eliminates second guessing; you know exactly the minimum guaranteed value of your account on the day you expect to withdraw from it.
A segregated fund is an investment fund that combines the growth potential of a traditional mutual fund with the security and financial protection of a life insurance policy.
If you’re thinking about contributing to your RRSP, talk to the MacDev Fin.ancial advisor that shared this blog with you. They can show you strategies for your money that typically leaves RRSPs in the dust every time.
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Disclaimer: The material and/or information provided in this blog document are for informational and/or educational purposes only. The opinions and views expressed in this blog document are solely those of the author and not necessarily those of the distributor, and do not constitute financial or taxation advise in any way. All financial endeavors should be vetted through a financial, tax, or other appropriate professional; example, life insurance broker, financial planner, accountant, and/or lawyer, as the audience sees fit. MacDev Financial Group Corp. and SET Financial Solution and any other corporation associated with the author, including but not limited to its agents, staff, associates and/or partners, will not assume any liability for any information disseminated in this blog document; indirectly, or assumed.