If a farmer brought 64 rabbits to a deserted island, and left them alone to multiply, 60 years later there would be an astonishing 10 billion rabbits living on the island.
That example is how Ajax author Robert R. Brown explains the need for all of us to save early in our RRSPs, and then leave the money alone to grow.
Brown’s book, Wealthing Like Rabbits, uses lots of great metaphors and examples to drive home key points about not only saving, but avoiding debt and overspending.
Retirement savings grow in importance as you age, he writes. Given that the Canada Pension Plan and Old Age Security deliver only a modest benefit, “it is better to be 65 years old with $750,000 saved than it is to be 65 years old with $750 saved.”
Canadians have two great options for retirement savings, “the RRSP – don’t pay tax now, grows tax-free inside, pay taxes later,” or the TFSA, “pay taxes now, grows tax-free inside, don’t pay tax later.” Either vehicle, he writes, “is an excellent way to save for your long-term future,” and ideally we should all contribute the maximum every year.
Yet, he writes, just as his beloved Maple Leafs “swear that next year they will do better,” Canadians all swear they will put more money away for retirement, yet don’t.
If you do save, explains Brown, pay attention to the cost of investing. Many mutual funds have high management expense ratios, or MERs, that “range from around two per cent to three per cent. That doesn’t sound like a lot, but it is,” he warns. It’s like the power of compound interest, but in reverse, Brown notes. Index funds and ETFs have far lower fees, allowing more of your money to grow, he points out.
Brown’s key takeaway with retirement saving is “start your RRSP early. Contribute to it regularly. Leave it alone.”
The book takes a look at the ins and outs of mortgages, and why it isn’t always the best idea to get the biggest house you possibly can. Watch out, he warns, when you go for a pre-approved mortgage at the bank – they may offer you an amount that is more than you want to afford. “You shouldn’t ask the bank to establish the amount you’ll be approved for. That needs to be your decision. After all, McDonald’s sells salads too. It’s up to you to order one,” he explains.
Credit cards are another way to pile up debt, he says. Not only are the posted interest rates high, “as much as 29.99 per cent,” but there are late payment fees, higher interest rates and extra fees for cash advances, annual fees just to have certain cards, and more. “Credit card companies are always looking for some sort of new and innovative way to jam you with a fee,” he advises. The 64 per cent of Canadians who pay off their credit cards in full each month enjoy an interest rate of zero, he writes – “think about that.”
He provides some great strategies for the 36 per cent of us who carry a balance on their cards, including leaving the cards at home, locking them up or freezing them to cut back on use, and cutting back on the overall number of cards.
Home equity lines of credit, which are easy to get, can backfire “if you have to sell your house during a soft market,” he warns.
Finally, Brown offers some sensible advice on spending – don’t eat out as often, and avoid alcohol when you’re out. Consider buying a used car over a brand new one. “If spending cuts alone won’t provide you with the cash flow you need to pay off your debt, you’re going to have to make more money,” he says. Get a raise, or get a little part-time job like dog walking, lawn mowing, or washing cars.
This is a great read – the analogies and stories help make the message much easier to understand. Once you’ve set the book down, you feel ready and energized to cure some of your worst financial habits.
If you are looking for a retirement savings vehicle that offers professional investing at a low MER, consider the Saskatchewan Pension Plan. SPP has a long track record of solid investment returns, and the fee is typically around one per cent. That means more of the money you contribute to SPP can be grown into future retirement income.
Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock. He and his wife live with their Shelties, Duncan and Phoebe, and cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22
Today, I’m very pleased to be talking to Katherine Strutt, general manager of the Saskatchewan Pension Plan. She has some exciting news to share with us about enhancements to the program, including an increase to the SPP maximum annual contribution level effective immediately for the 2017 tax year.
SPP is the only plan of its kind in Canada — a retirement savings plan, which does not require an employee/employer relationship. As a result, it can be of particular benefit to individuals with little or no access to a pension plan.
Thank you, Sheryl.
Q: For the last seven years the maximum annual contribution SPP members with RRSP contribution room could make was $2,500. How has that changed?
A: As you indicated, the maximum annual contribution limit was increased to $6,000 effective January 29, 2018, and it can be used for the 2017 tax year. However, members must still have available RRSP room in order to contribute the full $6,000 but the limit is now indexed as well, starting in 2019.
Q: If a member contributes $6,000 until age 65 how much will his or her pension be?
A: We estimated that someone contributing for 25 years and retiring at age 65 can end up with a pension of about $2,446 a monthbased on an 8% return over the period. However, we encourage people to use the wealth calculator on our website because they can insert their own assumptions. And if they want a more detailed estimate they can call our office.
Q: Can a spouse contribute for his or her partner if that person doesn’t have earned income and how much can the contribution be?
A: The SPP is a unique pension plan in that spousal contributions are acceptable. So, for instance, my spouse has to be a member. But I can contribute to his account and my account up to $6,000 each if I have the available RRSP room. If I’m making a spousal contribution, the money goes into his account, but I get the tax receipt. Other pension plans don’t offer that option. You could have a spousal RRSP, but with SPP you can actually have a spousal pension plan.
Q: Oh, that’s really fantastic. So actually, in effect, in a one-income family, the wage earner would get $12,000 contribution room for the year.
A: Yes, as long as they have available RRSP room, that’s for sure.
Q: That’s a really neat feature. And to confirm, members can contribute the full $6,000 for the 2017 tax year?
A: Yes, they can. Because we’re in the stub period right now, any contribution made between now and March 1st can qualify for the 2017 tax year.
Q: Have you had any feedback on the increased contribution level? If members are just finding out about the increase now, how much of an uptake do you expect given that, you know, maybe they haven’t saved the money or they haven’t allowed for it?
A: We’ve already had some members that have done it. I can’t tell you how many, but I was checking some deposits yesterday, and I saw that some people have already topped up their contributions. We anticipate that people who contribute on a monthly basis will start increasing their monthly contributions because they have an opportunity to do so. But it will be really hard to know until after March 1st how many people actually topped up their 2017 contributions.
The response has been very, very positive from members. They have wanted this for a long time. The new indexing feature is also very attractive as the $6,000 contribution will increase along with changes to the YMPE (yearly maximum pensionable earnings) every year.
Q: How much can a member transfer into the plan from another RRSP? Has that amount changed?
A: No, that amount has not changed. That remains at $10,000. But the board is continuing to lobby to get that limit raised.
Q: Another change announced at the same time is that work is beginning immediately on a variable pension option at retirement. Can you explain to me what that means and why it will be attractive to many members?
A: We have a lot of members who want to stay with us when they retire, but they’re not particularly interested in an annuity because annuity rates are low, and they do not want to lock their money in. They prefer a variable benefit type of option, but until now their only way of getting one has been to transfer their balance out of the SPP to another financial institution.
The new variable benefit payable directly out of our fund will be similar to prescribed registered retirement income funds, to which people currently can transfer their account balances.
It will provide members with flexibility and control over when and how much retirement income to withdraw, and investment earnings will continue to grow on a tax-sheltered basis. Those members who want to stay and get the benefit of the low MER and the good, solid returns I think will be attracted to this new option.
Some members may wish to annuitize a portion of their account and retain the balance as a variable benefit. This will ensure they have some fixed income, but also the flexibility to withdraw additional amounts for a major expense like a trip, for instance.
Q: Now, what’s the difference between contributing to an RRSP and SPP?
A: In some respects, they’re very similar in that contributions to the SPP are part of your total RRSP contribution limit. One of the biggest advantages I think that SPP has is it is a pure pension plan. It’s not a temporary savings account. It’s meant to provide you income in your retirement.
All of the funds of the members, are pooled for investment purposes, and you get access to top money managers no matter what your account balance is or how much you contribute. Typically those services are only available to higher net worth individuals, but members of SPP get that opportunity regardless of their income level.
And the low MER (management expense ratio) that in 2017 was 83 basis points, or 0.83 is a significant feature of SPP. Solid returns, and the pure pension plan, I think those are things that make us different from an RRSP. We are like a company pension plan, if you are lucky enough to have access to a company pension plan. That’s what we provide to people regardless of whether or not their employer is involved.
Q: If a member still has RRSP contribution room after maxing out SPP contributions, can he or she make additional RRSP contributions in the same year?
A: You bet. Your limit is what CRA gives you, and how you invest that is up to you. So for instance, people that are part of a pension plan might have some additional available RRSP room left over. They can also then contribute to the SPP and get a benefit from their own personal account, in addition to what they are getting from their workplace pension.
Q: MySPP also went live in late January. Can you tell me some of the features of MySPP, and what member reaction has been to gaining online access to SPP data?
A: The reaction from members has been very positive. They’ve been asking for this for a while, and we did a bit of a soft roll out the end of January with a great response. Then members are going to be getting information with their statements, and we expect an even bigger uptake.
Once they’ve set up an account, they can go in and see the personal information we have on file for them, who they’ve named as their beneficiary, when the last time was that they made a contribution and what their account balance is. Furthermore, if they’ve misplaced a tax receipt or can’t find their statement, they can see those things online.
Retired members can get T4A information and see when their pension payments went into their accounts. So it’s a first step, and we think it’s a really positive one, and we’re getting some really good feedback from our members.
Q: Finally, to summarize in your own words, why do you think the annual increase in the SPP contribution level, introduction of a variable benefit and MySPP makes Saskatchewan Pension Plan a better pension plan than ever for Canadians aged 18 to 71?
A: Well, I think that by having an increased contribution limit that is indexed, the program might be more relevant to people. It certainly will be a bonus I think to employers who wanted to match their employee contributions but were running up against the old limit. This will give them more opportunity to do so.
It will also improve the sustainability of SPP over the long term as people are investing more. The variable benefit we’ve introduced will give retiring members more options, and it will allow them to keep going with this tried and true organization well into their retirement.
MySPP allows members access to their account information whenever they wish, 24/7 on all their devices. That will be attractive to younger prospective members.
Exciting times. Thank you, Katherine. It’s been a pleasure to chat with you again.
Thanks so much, Sheryl.
*This is an edited transcript of an interview recorded 1/31/2018.
Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.
It’s tough to come up with ideas year after year for memorable holiday gifts, particularly for young adults. One gift that will stand the test of time is contributions to a retirement savings account with the Saskatchewan Pension Plan.
Anyone age 18 to 71 can join SPP. Participation is not restricted by where they live or membership in other plans. However, in order to contribute members must have available RRSP room. The member application form is available online and must be submitted with a photocopy of the prospective member’s birth certificate, driver’s license or passport.
Maximum annual contributions (which become locked in until retirement) are $2,500/year but up to $10,000 per year can be transferred in from another RRSP. SPP is designed to be very flexible and to accommodate individual financial circumstances. There is no minimum contribution. Even contributing $10 per month will build an SPP account and provide a plan member with additional pension at retirement.
Contributions can be made in a number of ways: directly from a bank account using the PAC system on the 1st or 15th of the month; at a financial institution using a contribution form; using a VISA or MasterCard; through online banking; or by mail to the Plan office in Kindersley. SPP also provides the option to make contribution online using your VISA or MasterCard.
This means you can make an SPP contribution as a one-time gift this Christmas or make recurrent gifts at regular or irregular intervals for future occasions. One way to encourage your friend or relative to continue contributing to SPP is to offer to match contributions up to a specified amount – much like employers do in company plans.
The Plan’s average return to members since inception (1986 – 2015) is 8.10%. The five year average is 7.57% and the ten year average is 5.25%. SPP has independent, professional money managers. The funds are invested in a diversified portfolio of high quality investments to ensure a competitive rate of return.
Chances are that 20-somethings entering the work force today will have precarious work for at least the first few years of their career with organizations that do not offer a retirement savings plan. Once they are married and have children, retirement savings may take a back seat to mortgage payments and daycare costs.
Helping a friend or relative to develop the retirement savings habit and topping up their savings is an invaluable gift. Savings of just $2,500/year earning interest at 5% will result in a retirement savings balance of $237,672.11.
So make gift giving this year easy by putting SPP under the Christmas tree!
As part of the ongoing series of podcast interviews on savewithspp.com, today I’m talking to lawyer Ari Kaplan, a partner in the Pension and Benefits Group of the Toronto law firm Koskie, Minsky, L.L.P.
Ari is the author of Canada’s leading textbook on pension law, and he has acted as counsel in some of Canada’s most widely known pension cases before the Supreme Court of Canada. In addition, he teaches pension law as an adjunct professor of law at both the University of Toronto and Osgoode Hall Law School.
In his spare time, Ari heads up licensing and publishing at Paper Bag Records, a leading, independent record label and artist management company also based in Toronto.
Today, we are going to talk about the Canada Pension Plan. In the ongoing national debate regarding how Canadians can be encouraged to save more for retirement, Ari is a staunch advocate for an expansion to the Canadian Pension Plan.
Welcome, Ari, and thanks for talking to me today.
My pleasure, Sheryl. Thanks for having me.
Q: How many Canadians currently have workplace pension plans?
A: Well, that’s a good question to put everything in perspective. Over 60% of working Canadians actually have no workplace pension plan, and they must rely solely on CPP and their own personal savings for their retirement income.
Q: Why do you think that an enhanced Canada Pension Plan is the best way to give Canadians a more robust retirement income?
A: Very simple. It’s currently the only universal and mandatory savings scheme in the country. It’s portable from job to job. If you’re a student, you can work for the summer in British Columbia and then come back to a full-time job in Ontario, and your CPP credits will go with you. Also, it doesn’t just cover employees. It applies to self-employment, which most workplace pension plans don’t.
Q: As early as 2008, industry guru Keith Ambachtsheer wrote a C.D. Howe Institute commentary about the benefits of enhancing the Canada Pension Plan. Yet, in December 2013, the conservative government in several Canadian provinces voted against this proposal. Why do you think this occurred?
A: Every respected economist in the country supports a CPP expansion. The reason why the current government did not support it is political, not principled.
There was political pressure from business lobby groups who did not want to be forced to contribute employer revenue toward their employees’ retirement. There was political pressure from the financial services lobby, because they do not benefit at all when the retirement savings of Canadians is held in the CPP Trust Fund.
And finally, there’s fear among Canadian voters, who’ve been led to believe that anything opposed by business must be bad for them, too. Some of them also don’t want to be forced to save for retirement.
Q: Instead of expanding the CPP, the late finance minister, Jim Flaherty and the provinces endorsed pooled registered pension plan legislation as the way to encourage Canadians to save more for retirement. What are the key features of PRPPs?
A: Good question. PRPPs are basically like voluntary employer-sponsored group RRSPs. The funds are locked in, so it resembles a registered defined contribution plan. Your funds can also be ported to another plan and there are survivor benefits. So, it’s basically like an “RRSP-plus.”
Q: Why do you think that PRPP’s are not the answer?
A: Well, I think PRPPs are just a prime example of what I said earlier – political lobbying by business and the financial industry.
The employer is not required to contribute a dime even if the company voluntarily sponsors a PRPP.
An employee can opt out, or voluntarily set their contribution rate to zero, which gives zero benefit to the employee.
There’s very little benefit security. Like I said, it’s like a DC plan, so you get to choose member-directed investment funds. If you don’t invest your money well, then you won’t get a good pension.
The cost structure is really not that much different than a 500-member group RRSP. The management expense ratio (MER) will be much higher under a PRPP than under a large workplace pension plan or, for that matter, under CPP, where the efficiencies of scale are such that the costs are very, very, very low.
It will create a huge windfall to insurance companies and other financial institutions who manage these funds, because there’s very few cost controls. There are lots of problems in group RRSPs with so-called “hidden fees” and there’s no indication that that will change with PRPPs.
I can go on, but I think you get the idea.
Q: Groups such as the Canadian Federation of Independent Business say that required employer contributions to an expanded CPP would amount to a significant payroll tax that could slow down economic growth. How would you respond to this statement?
A: To be quite blunt, this is a false and misleading statement. Anyone who tells you it’s a tax is not telling you the truth. This is employee money. It goes into a pension fund. It then goes back to the employee.
Q: Ontario Premier, Kathleen Wynne’s government is currently holding consultations on the design of an Ontario Retirement Pension Plan. What are some of the key features of that plan?
A: At the end of December of last year, the Ontario government introduced the first reading of the bill for the Ontario Retirement Pension Plan intended to commence at the beginning of 2017. The reason for the delay period is because there’s hope that the next federal government may agree enhance CPP, which could make the ORPP redundant.
But the key features are that it’s a mandatory plan. It’s like an adjunct to CPP. So, it would be mandatory in all Ontario workplaces, except where the employer already has a workplace pension plan for its workforce, and it would be integrated with the CPP.
Q: Several other provinces, like PEI, may jump on the same bandwagon, so why do we still need a national CPP enhancement?
A: Well, it would better if the federal government came on board to make it nationwide. I mean if we just have it province by province, then it’ll be more of a patchwork. This could influence inter-provincial mobility. We don’t want to discourage full inter-provincial mobility by Canadians.
Q: Well – and, of course, the other issue is – just like pension legislation across the country, which is similar, but actually very different when it comes to the details – we run the risk of getting ten or 11 completely different plans.
A: And that would result in over-regulation and an increase in transaction costs although the whole point of this is to minimize and optimize the costs of running the fund — which is why CPP is good model.
CPP is viewed as one of the best universal, mandatory state-sponsored pension plans in the world. It would be a shame for us to have to rely on province-by-province, patchwork participation in such a scheme.
Also, you know, at the end of the day, this is really something that benefits all Canadians, regardless of what age or generation they are in. One way or the other, taxpayers will be taking care of older Canadians who are poor. It’s better that Canadians have their own resources to take care of themselves; and that’s an optimal use of taxpayer resources.
So, I just really think it’s a good idea, and I really think that this is the ballot question for the upcoming federal election this year. We saw this 50 years ago when CPP was introduced. I believe this year there will be a renaissance of that issue.
Q: Thanks, Ari. It was great to talk to you.
A: My pleasure, Sheryl. Be well.
—– This is an edited version of the podcast posted above which was recorded on February 3, 2014.