Saving for retirement has never been as important as right now. Unlike previous generations, most Canadians do not have a workplace pension. Many are depending on their private retirement savings to help them through their retirement years. Canadians are also living longer making saving for retirement that much more important. Here is a snapshot of the current situation of retirement savings in Canada. Also how we call take advantage of the Registered Retirement Savings Plan (RRSP) right now.
Current state of retirement in Canada
Canadians are not saving the way they used to and that is leading to many worry about how they are going to fund their retirement years. Census data shows, almost two-thirds of Canadian households are saving for retirement, but the national household savings rate has fallen from 20 per cent 20 years ago to less than five per cent today.
Added to this a CIBC poll reveals that 32 per cent of Canadians between 45 and 64 have nothing saved for retirement and 53 per cent of Canadians say they don’t actually know if they are saving enough.
Women are especially vulnerable, they need to save more than their male counterpart to end up with the same retirement lifestyle. According to a study called Gender Retirement Gap by Diane Garnick (October 2016) women should be saving 18 per cent of their before tax income into their retirement nest egg.
Added to this the rate of workplace pensions in Canada is falling. According to Statistics Canada less than 40 per cent of workers have access to a workplace pension, and many of them are not defined benefit plans but rather contribution plans, where the payouts can fluctuate. This can add to income insecurity in retirement.
What is an RRSP?
An RRSP is a retirement savings plan. Anyone who files an income tax return and has earned income can open and contribute to an RRSP. It’s established by the individual and registered to the government. Each year you can make a contribution of 18 per cent of your income up to a maximum amount. For 2019 it is $26,500.
All unused contribution room is carried forward. RRSP contributions reduce your income tax from the top. Therefore using the RRSP when you’re in the highest income bracket is more useful. As well, any income you earn in the RRSP is exempt from tax as long as the funds remain in the plan. You only pay tax when you withdraw money from the plan in your retirement. If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.
What is the advantage of an RRSP?
You get immediate tax relief by deducting your RRSP contributions from your income each year.
The money you make on your RRSP investments is not taxed as long as it stays in the plan.
You’ll pay tax on your RRSP savings when you withdraw them from the plan. That includes both your investment earnings and your contributions. But you have deferred this tax liability to the future when it’s possible that your marginal tax rate will be lower in retirement than it was during your contributing years.
Who should be using an RRSP?
An RRSP is advantageous to all Canadians, but especially those in the highest marginal tax bracket. RRSP contributions are deductible on your total income earned, therefore higher earners stand to receive a larger tax refund if they make the same contribution compared to a lower income earner.
Here are two examples of how the same contribution can give different results
- Joe lives in Ontario and earns $50,000 a year. He makes $1000 RRSP contribution.
His total income tax burden will be reduced by $297
- Jillian live in Ontario and earns $150,000 a year. She makes a $1000 contribution as well.
But her total income tax burden is reduced by $464.
Figure out what your marginal tax rate is. If you are still in a lower bracket and expect to make more money you may be wiser to save your money in a Tax Free Savings Account (TFSA) and move that money over once you salary rises. In the TFSA your money grows tax free and any money you take out can be deposited again. This makes it a great option for lower income Canadians as well.
The most important point to remember is when it comes to your RRSP and saving for retirement, the earlier you start the better. Investing a smaller early on is usually more beneficial than investing a larger amount later. Generally the rule is, put 10 per cent of our before tax income away. According to the CIBC study Canadians estimate they need $756,000 saved to retire comfortably. Go into a retirement calculator now to see what your retirement nest egg looks like and what kind of income you should expect. If you are unhappy with the results you will know immediately you have to save more.