Tag Archives: Registered Retirement Savings Plans

Even those with workplace retirement savings plan coverage still worry about retirement: Aon research

Recent research conducted for Aon has found that Canadian workers in capital accumulation plans (CAPs), such as defined contribution (DC ) pension plans or group RRSPs, while confident about these plans and their own finances, “find it hard to save for retirement and are worried about having enough money to retire.”

The global actuarial and HR firm’s report, Global DC and Financial Wellbeing Employee Survey, also found that “fewer than half” of those surveyed have a particular goal for retirement savings, and that “depending on other sources of income, many find their current plan contribution levels are inadequate to ensure their total income needs in retirement,” according to an Aon release.

Among the other findings of the report:

  • Of the 1,003 respondents, only 27 per cent saw their financial condition as poor
  • Almost half of those surveyed say outstanding debts are preventing them from saving for retirement
  • Two of five who are in employer-matching plans (where the employer matches the contributions made by the employee) are not taking full advantage of the match
  • Of those who expect to fully retire from work, two-thirds expect to do so by age 66; 30 per cent expect to keep working forever in some capacity.

Save with SPP reached out to one of the authors of the research, Rosalind Gilbert, Associate Partner in Aon’s Vancouver office, to get a little more detail on what she made of the key findings of the research. 

Do you have a sense of what people think adequate contributions would be – maybe a higher percentage of their earnings?

“I don’t believe most respondents actually know what is ‘adequate’ for them from a savings rate perspective.  The responses are more reflective of their fears that that they don’t have enough saved to provide themselves a secure retirement.  Some may be relating this to the results of an online modeller of some kind, or feedback from financial advisors.

“I also think that many employees don’t have a clear picture of the annual income they will be receiving from Canada Pension Plan/Old Age Security to carve that out from the income they need to produce through workplace savings.  Some of this comes back to not having a retirement plan in terms of what age they might retire and, separately, what age they might start their CPP and OAS (since both of those drive the level of those benefits quite significantly).”

Is debt, for things like mortgages and credit cards, restricting savings, in that after paying off debt there is no money left for retirement savings?

“We were surprised to see the number of individuals who cited credit card debt as a barrier to saving for retirement. Some of this is the servicing (interest) cost, which is directly related to the amount of debt (and which will increase materially if interest rates do start to rise, which many are predicting).

“I think that the cost of living, primarily the cost of housing and daycare, is currently quite high for many individuals (particularly in certain areas like Vancouver), and that, combined with very high levels of student loans, means younger employees are just not able to put any additional money away for retirement.  There is also a growing generation of employees who are managing child care and parent care at the same time which is further impeding retirement savings.”

We keep hearing that workplace pensions are not common, but it appears from your research that participation rates are high (when a plan is available).

“This survey only included employees who were participating in their employers’ workplace retirement savings program.  So you are correct that industry stats show that overall coverage of Canadian employees by workplace savings programs is low, but our survey showed that where workplace savings programs are available, participation rates are high.”

What could be done to improve retirement savings outcomes – you mention many don’t take advantage of retirement programs and matching; any other areas for improvement?

“In Canada, DC pension plans and other CAPs are not as mature as they are in other countries such as the UK and US.  That said, we are now seeing the first generation of Canadians retiring with a full career of DC (rather than DB) retirement savings.  Appropriately, there has been a definite swing towards focusing on decumulation (outcomes) versus accumulation in such CAPs.

“From service providers like the insurance companies that do recordkeeping for workplace CAPs, this includes enhanced tools supporting financial literacy and retirement and financial planning.  Also, many firms who provide consulting services to employers for their workplace plans encourage those employers to focus on educating members and encouraging them to use the available tools and resources.

“However, if members are required to transfer funds out of group employer programs into individual savings and income vehicles (with associated higher fees and no risk pooling) when they leave employment, they will see material erosion of their retirement savings. Variable benefit income arrangements (LIF and RRIF type plans) within registered DC plans are able to be provided in most jurisdictions in Canada, but there are still many DC plans which still do not offer these.

“It is more difficult to provide variable benefits when the base plan is a group RRSP or RRSP/deferred profit sharing plan (DPSP) combination, but the insurance company recordkeepers all offer group programs which members can transition into after retirement to facilitate variable lifetime benefits.  The most recent Federal Budget was really encouraging with its announcement of legislation to support the availability of Advanced Life Deferred Annuities (ALDAs) and Variable Pay Life Annuities (VPLAs) from certain types of capital accumulation plans.

“There is still more work to be done to implement these and to ensure that they are more broadly available and affordable, but it is a definite step in the right direction.  A key benefit of the VPLAs is the pooling of mortality risk while maintaining low fees and professionally managed investment options within a group plan.  The cost to an individual of paying retail fees and managing investments and their own longevity risk can have a crippling impact on that member’s ultimate retirement income.”

We thank Rosalind Gilbert for taking the time to connect with us.

If you don’t have access to a workplace pension plan, or do but want to contribute more towards your retirement, the Saskatchewan Pension Plan may be of interest. It’s a voluntary pension plan. You decide how much to contribute (up to $6,200 per year), and your contributions are then invested for your retirement. When it’s time to turn savings into income, SPP offers a variety of annuity options that can turn your savings into a lifetime income stream.

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

BOOK REVIEW: Wealthing Like Rabbits

By Sheryl Smolkin

I don’t often review personal finance books because it seems to take an inordinate amount of time to wade through yet another statement of the obvious just to glean enough cogent information to give readers a taste of what the book is all about.

But when I read accolades from the likes of Gail Vaz-Oxlade, Preet Bannerjee, Roma Luciw, Dan Bortolotti plus a whole bunch of my other favourite personal finance bloggers in the introductory pages of the book, I thought I’d better keep on going to find out what all of the fuss is about.

Author Robert R. Brown says Wealthing Like Rabbits is written to be a fun and unique introduction to personal finance and suggests that any book that includes sex, zombies and a reference to Captain Picard is “an absolute must read,” regardless of genre.

Brown starts out by asking how many rabbits there would be after 60 years if 24 rabbits were released on a farm on a great big island. Before providing an answer to this question, he introduces the need to save for retirement, although he doesn’t begin to predict how much you or I will need. His only conclusion is that “more is better” because it is better to be 65 years old with $750,000 saved than 65 years old with $75,000 saved.

Then he reveals that there would be 10 billion rabbits after 60 years and launches into a discussion of the history and key features of registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). Subsequently he riffs about how many zombies there would be in England if France sent 100/week for 40 years.

If you are still with me, you may wonder — what is the point of all this?

Not surprisingly of course, it’s to illustrate the power of compounding, whether in relation to rabbits, or money or zombies. We learn that just $100/wk deposited in an RRSP earning 6% for 40 years will add up to a nest egg of $624,627.

But the positive and the negative impact of compounding interest are also very cleverly brought home in later chapters. I particularly liked the comparison of brothers Mario and Luigi who both had similar incomes and $100,000 for a down payment on a house. They went to the bank to find how big a mortgage they were eligible for.

Mario’s banker told him “he could afford” to buy a house for $525,000. Luigi told the mortgage specialist he needed $10,000 for closing costs and the $90,000 balance had to cover at least 20% of the purchase price of the house so the most he would be willing to spend is $450,000.

The story continues with Mario buying a 3,000 square foot home for $525,000. Luigi sticks to his budget and buys a 1,600 square home nearby for $350,000. Over 20 years, compound interest on the mortgage means that Mario ends up paying $807,538 for his house while Luigi only has to fork out $538,359.

Similarly, when it comes to debt, Brown illustrates that high interest credit card debt can quickly escalate if balances are not paid off every month. Even I did not realize until recently that if you miss your payment due date by even as little as one day, the interest-free grace period completely disappears. In fact you have to pay interest on the amount of each transaction from the date each and every purchase was made.

Brown also reviews the characteristics of a line of credit; a home owner’s line of credit; bank loans and consolidation loans. While generally he believes all of these can cause severe damage to your financial health, he recognizes that when handled properly, they each have their place.

But he draws a line in the sand when it comes to payday loans. Never, ever get a payday loan, Brown says.

He gives the example of Buddy who borrows $400 from a payday loan place because his furnace broke down. He is charged $21 for every $100 he borrows for just two weeks. Two weeks later he pays the payday lender $484. That’s 21% for only 14 days, which works out to 546% annually. And that’s only the beginning.

If Buddy can’t pay in two weeks the payday loan company will charge him an NSF penalty and continue to accumulate stratospheric interest rates on the whole amount. Further defaults mean he will likely be hounded both by telephone at home and at work day and night. The file may be handed over to an even more aggressive collection agency.

In the second last chapter, Brown offers a brain dump of financial tips (which he doesn’t call “Fifty Shades of Brown”):

    • Spousal RRSPs are cool.
    • MoneySense magazine is a great source of personal finance information.
    • Eat dinner at home. Then go out for a fancy coffee and desert to Starbucks.
    • Buy life insurance, not mortgage insurance from your bank.
    • Read Preet Banerjee’s book Stop Overthinking Your Money for the skinny on life insurance.
    • Use the noun“wealth” as a verb. So instead of saving $150/week in your RRSP you will be wealthing your money.

And finally, Brown’s parting words at the end of the book are “you’ve got to show up.” Put some money away for your future. Live in a house that makes sense. Be smart about how you spend your money. Spend less than you earn. Be comfortable living within your means. He says it really is that simple.

Wealthing Like Rabbits is funny and engaging and it hits all the personal finance bases. Regardless of whether you are a Millennial, a Gen Xer or a Boomer, you will find lots of tips on how to save more, spend less and still have a lot of fun along the way. 

The book can be purchased in hardcover for $16.95 and the epub and kindle versions are available for $7.99.

How much of your savings can you tax shelter?

By Sheryl Smolkin

Saving for retirement or any other important goal like a home purchase or your child’s education is not easy. But if you are able to deduct your annual contributions from taxable income and/or accumulate investment earnings tax-free, the balance in your accounts will accumulate much faster.

Most Canadians have heard about and save in at least one of the following registered accounts: Registered Retirement Savings Plans (RRSPs), pension plans, Tax Free Savings Account (TFSAs) or Registered Educational Savings Plans. But many may not be aware of exactly how much money they can contribute to these programs annually or carry forward to future years.

RRSP/Pension Plan 
In 2014 you can contribute 18% of your income to a defined contribution (DC) pension plan to a maximum of $24,930. RRSP contributions are based on your previous year’s earnings (2013 earnings for 2014 contributions). As result of the one year lag, maximum RRSP contributions for 2014 are $24,270.

In order to contribute up to $2,500/year to the Saskatchewan Pension Plan (SPP), you must have RRSP contribution room. Maximum permissible defined benefit (DB) pension plan contributions are calculated per year of service, and reduce your DC plan or RRSP contribution room.

RRSP and pension plan contributions are tax deductible and the contributions accumulate tax deferred. However, you do not have to take a deduction for RRSP contributions in the year you contribute. You can wait until a later year when your earnings are higher and if you do, the tax savings will be greater.

Unused RRSP contribution room can also be carried forward to use in any future year. And you can still catch up even if you are retired. For example, if you have unused RRSP contribution room from past years and funds are available, contributing to your own or your spouse’s RRSP is allowed up until the end of the year the plan holder turns age 71. However, you cannot contribute to an RRSP for a person (yourself or your spouse) who already turned age 71 in the previous year.

Unlike DB or some DC pension plans (i.e. SPP), funds in your RRSP are not locked in. That means you can take money out at any time subject to paying taxes on the money in the year of withdrawal.  But it is important to remember that once you withdraw money from your RRSP the contribution room will not be restored and you lose the benefit of future compounding on the amount of the withdrawal.

If tax-free withdrawals are made under the RRSP Home Buyers’ Plan or Lifelong Learning Plan, you will eventually be liable for taxes on the money if you do not pay back the principal over a prescribed period.

Tax-Free Savings Account
The TFSA is a flexible, registered savings account that first became available to Canadians in 2009. From 2009 to 2012 maximum annual contributions were $5,000/year. Based on indexation due to inflation, the annual contribution maximum was increased to $5,500 in 2013. 

A TFSA can be used to enhance retirement savings or to accumulate money for other goals. Contributions are not tax-deductible but savings grow tax-free. If you make a withdrawal from your TFSA, the contribution room is restored in the year following the year you take money out. Unused contribution room is also carried forward.

Because withdrawals are tax free and contribution room is restored after a withdrawal, a TFSA can be an ideal place to stash your “emergency funds.” Another benefit of a TFSA is you can continue to make contributions indefinitely, unlike RRSP contributions which must end after age 71.

An additional attractive feature of a TFSA is that neither income earned within the plan nor withdrawals affect eligibility for federal income-tested government benefits and credits such as Old Age Security, the Guaranteed Income Supplement and the Canada Child Tax Benefit.

Also read:
SPP or TFSA?
TFSA or RRSP? Try these five tests 

Registered Educational Savings Plan
A Registered Educational Savings Plan (RESP) is a tax-sheltered plan that can help you save for a child’s post-secondary education. Unlike an RRSP, contributions to an RESP are not tax deductible. However, investment earnings accumulate tax-free in the plan. When money is paid out of the plan it is taxable in the hands of the student, who typically will be in a lower income bracket than the parent or other contributor.

There is no limit on annual RESP contributions but there is a lifetime maximum of $50,000 per child. However, there are annual and lifetime maximums on the Canadian Education Savings Grant (CESG) available for eligible beneficiaries under the age of 18.

The federal CESG matches 20% on the first $2,500 (maximum of $500) contributed annually to an RESP. The maximum total CESG the government will give, up to age 18, is $7,200 per beneficiary. The grant proceeds are invested along with your contributions, further enhancing the benefits of tax-deferred and compound investment growth within your plan.

A $500 Canada Learning Bond (CLB) is also provided for children of families who are entitled to the National Child Benefit Supplement (net family income of $44,701 in 2015) and who are born after December 31, 2003. These children also qualify for CLB instalments of $100 per year until age 15, as long as they continue to receive the National Child Benefit Supplement. The total maximum CLB payable per child is $2,000.

CLBs are allocated to a specific child; unlike CESGs, they cannot be shared with other beneficiaries. There is no requirement to make contributions in order to qualify for the CLB.

Adding it all up
Over the years RRSP/pension savings limits have crept up and with the introduction of TFSAs in 2009, Canadians have another tax-effective way to save. RESPs are particularly attractive vehicles for educational savings as the federal government offers CESG grants and the Canada Learning Bond as further incentives for saving.

Understanding annual savings limits for all of these registered plans will help you to budget and save the maximum affordable amount every year in the most tax-effective way. Any unused savings room that can be carried forward will come in handy as your income increases or if you ever need to tax shelter a lump sum such as the proceeds of a severance package or capital gains on the sale of a property other than your principal residence.

Book Review: RRSPS THE ULTIMATE WEALTH BUILDER

By Sheryl Smolkin

Feb13-BookcoverRRSPSPape1

If an alien parachuted into Canada in the first two months of the year and needed to quickly understand the what, when, why and how of registered retirement savings plans (RRSPs), there is no better source of information than Gordon Pape’s new book RRSPs The Ultimate Wealth Builder.

The prolific writer has authored and co-authored over 20 books with down-to-earth investment advice, many of which have become best sellers. And this one is definitely another winner.

RRSPs were created by Louis St. Laurent’s Liberal government and have been around since 1959. Of course as Pape explains, there have been many important tweaks along the way.

  • Contribution levels have jumped from 10% of earned income (maximum of $2,500) to 18% of the previous year’s earned income (maximum of $24,270 in 2014.)*
  • Since 1996, unlimited carry-forwards of unused contribution room have been permitted.
  • Contributions can be made until age 71. The maximum age was reduced to age 69 as part of the government’s austerity program in 1997, but raised back to 71 in the 2007 budget. Now there is growing demand to bump it up further to age 73.
  • Registered retirement income funds (RRIFs) were added to the program in the 1970s, allowing taxpayers to further tax-shelter funds after retirement subject to mandatory minimum withdrawals.

Early chapters of the book set the scene with an extensive RRSP vocabulary (Chapter 2) and the rules relating to contribution levels, deadlines, carry-forwards and spousal plans (Chapter 3).

In Chapter 4 Pape says the most common mistake people make is to walk into their bank and say, “I want to buy an RRSP.” “You invest in an RRSP so the type of RRSP you select will have a huge impact on how your money will grow over the year,” he says.

If you are a regular RRSP contributor, you may think you have little to learn about the subject. But here are a few interesting tidbits I picked up that you may not be aware of:

  • You can contribute in one year and defer your tax deduction to a later year when your earnings are higher and the deduction is worth more.
  • If you don’t have sufficient cash but you have a self-directed RRSP, you can make a contribution “in kind” of another qualified investment at its fair market value. For example you can contribute a $5,000 GIC maturing in three years.
  • If you receive a retiring allowance or severance pay it can be transferred directly to your RRSP without withholding tax even if you do not have contribution room. You can transfer in $2,000 times the number of years or part years you were with the employer up to and including 1995 without withholding tax. You can also make an additional tax-free contribution of $1,500 for each year or part year prior to 1989 in which no money was vested for you in a pension plan or deferred profit sharing plan.

Pape also shares important details about making RRSP withdrawals for buying a home or returning to school and the complex RRSP mortgage and repayment rules.

For example, did you know that if your RRSP funds are used to invest in a mortgage for you or your children, interest payments have to be made at market rates?

In addition, non-arm’s length RRSP mortgages must be administered by an approved lender under the National Housing Act and insured either through Canada Mortgage and Housing or a private company like Genworth MI Canada.

Chapters 12, 13 and 14 thoughtfully address the perennial questions: RRSP or mortgage pay down? RRSP or debt pay down? RRSPs or Tax-free savings accounts.

The one area where I disagree with Pape is on the merits of an employer-sponsored Group RRSP. He says they are often not a great deal because employers can’t contribute to them directly; Group RRSP contributions reduce your total contribution level for the year; and Group RRSPs frequently offer a limited number of investment options.

In my experience working as Canadian Director of Research for a global actuarial consulting firm, smart employers view their Group RRSP as an important attraction and retention tool. They generally incent employee participation by grossing up salary to match or partially match employee contribution levels.

In addition, fees are often lower than individual RRSPs opened with retail financial institutions and there is a large (but not too large) selection of diversified investment funds for employees to choose from. Interactive websites plus in person and online education are also frequent valuable group RRSP add-ons.

What I do not disagree with is that RRSPs can be a powerful machine for creating wealth that you ignore at your peril! RRSPs The Ultimate Wealth Builder can be purchased online from Indigo books for $13. An e-reader version is also available for $13.99 from the Kobo bookstore.

*Contributions to the Saskatchewan Pension Plan of up to $2500/year form part of your RRSP contribution limits. You can also transfer $10,000 from your RRSP to SPP each year until you are 71 without tax consequences. In 2013 the SPP balanced fund earned 15.77%.

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