RRSP tune-up: double down or change course?
With the new year comes the season we traditionally focus our financial attention on our Registered Retirement Savings Plans (RRSPs). However, in the current climate this may be the least anticipated RRSP season in some time.
Nevertheless, saving for retirement remains the key financial goal for most Canadians, and depending on your time horizon, even a little fine-tuning now can make a big difference to your long-term retirement plan. Consider the following three key aspects of any retirement strategy.
Contributions. Are you contributing the right amount to meet your goals? To find out, it may be time to rerun your retirement income projections. Given your savings to date, plus your current rate of contributions, what kind of an income stream might you expect in retirement? If you’re falling short, consider how to turbocharge your savings strategy. Many Canadians have significant RRSP contribution room available to them from previous years. If you are one of them, consider a monthly contribution plan to help you catch up. If you are already on a plan, see what even a small increase in monthly contributions could mean for the ultimate projected value of your plan at retirement.
For some investors, borrowing to make a contribution for this year’s limit or as a strategy to make up unused contribution room could be an option. If your contribution generates a significant tax refund and you use that refund to repay the loan, this strategy can be especially effective without compromising your household finances. Be sure to enlist professional advice when considering this strategy.
Investment returns. Does your retirement investment plan include a target return from your RRSP? This figure is a key variable in determining how much savings you are likely to have available at retirement. If you haven’t revisited your strategy in a while, it makes sense to revisit this number. Is it still the right one? Would a small increase in your target performance make a difference to your plan? Or, if your portfolio has done better than expected in recent years, perhaps there’s less pressure on performance in years ahead.
Before changing your performance target, consider your personal tolerance for risk. Aiming for higher returns usually comes with taking on more risk. Be sure that you are comfortable with this. Last year saw some big swings in the equity markets as the pandemic ebbed and flowed. Did that raise your anxiety levels? The right performance target for you is one that allows you to sleep at night.
TFSAs and other ways to save. There are other ways to save for retirement, including Tax-Free Savings Accounts (TFSAs) and non-registered investment accounts. While TFSAs have tax-free rather than tax-deferred growth, RRSP contributions can not only lower your taxable income this year but also help generate a tax refund. There is no immediate tax benefit to your TFSA contribution. On the other hand, withdrawals from TFSAs are not taxed, while withdrawals from RRSPs are taxed as income.
What is the right strategy for you? It depends. If you can generate significant tax savings through your RRSP contributions, that may be the best option. If you have already maxed out your RRSP room, TFSAs offer an attractive way to get tax-free growth beyond your RRSP. While there are some general rules common to retirement income planning, the best approach is to do the calculations using your own financial situation. Relying on professional advice here is recommended.
Any contribution to your RRSP is an investment towards a better retirement. But with a quick review and a few adjustments here and there, you can be confident that you are maximizing the benefits and on track for the best retirement possible for you.