Canadians fret over retirement as RRSPs hit 5-year high

Maybe it’s the rise in self-employment we’re seeing across Canada, or a belief that we’ll all live longer, but it appears more Canadians are socking away money in Registered Retirement Savings Plans (RRSPs).

A recent RBC poll says younger Canadians in particular are racking up their retirement savings, and at a level not seen since the global financial crisis.

The poll, conducted late last year by Ipsos Reid and released just in time for RRSP promotion season, says 59 per cent of Canadian adults own RRSPs, compared to 55 per cent in 2012.

The average planned contribution per person is $4,653, up $500 from a year earlier

About 50 per cent of people between ages 18 to 34 said they owned RRSPs, the highest number since 2008 and 10 per cent higher than 2012. The contribution size among this age group also rose 39 per cent to an average of $4,329. That compares to $3,104 last year.

Younger people may also be aware that pensions are rapidly becoming a perk of the past and the government can’t be relied to support them in retirement.

That jives with a recent survey from Franklin Templeton Investments showing increased uncertainty about what Canadians can expect in retirement.

Franklin Templeton’s Philip Bensen says the fears range from dwindling confidence in government programs to lingering fears from the last recession.

“For the Millennial generation in particular, fears about employment in both the short- and long-term, and the impact that will have on their ability to contribute to RRSPs at an early age,” he says.

The Franklin Templeton poll also shows Canadians yet to retire are evenly split about what to expect for their golden years.

About a third (31 per cent) think they’ll be better off than previous generations, 36 per cent say it will be worse and 32 per cent believe it will be similar.

Pre-retirees aged 45 to 54 were the most concerned, with 41 per cent expecting their retirement to be worse than previous generations and only 26 per cent expecting it to be better.

Those aged 18 to 24 were more optimistic, with 37 per cent holding a better outlook for retirement.

"It was interesting to see that the highest level of anxiety peaked 11 to 15 years before retirement, indicating that people begin thinking about their retirement income strategies earlier than expected," stated Michael Doshier, vice president of retirement marketing at Franklin Templeton.

RRSPs don't make sense for everyone

Despite all of the noise around RRSP season, some experts are reminding investors that the investment vehicle isn’t for everyone.

Envision Financial expert Brenda Richards says people need to take into consideration their marginal tax rate, investment goals both short- and long-term, risk tolerance and the length of time until they plan to call it quits in their working life.

“RRSPs are best used as a tax sheltering and tax deferral tool and making contributions during your low income years means a smaller tax break," says Richards. "Someone who's just starting off in their career and isn't making a lot of money may want to look at options outside of RRSPs."

She uses an example of someone with $35,000 in taxable income. Their marginal tax rate will be about 20 per cent, meaning they’ll get 20 per cent of their RRSP contributions back after filing taxes. For those earning $49,000, the amount they’ll get back from RRSP contributions jumps to nearly 30 per cent.

“When you’re earning less, it would probably make more sense to put your money into a TFSA [Tax Free Savings Account] where you can still access the money and won’t be taxed on any earnings,” Richards says. If you’re starting to make more money and are looking for some tax relief, that’s the time to start thinking about RRSPs.”

She says RRSPs make for a good tax-deferral strategy for people in higher income brackets.

What do with that money you get back? Experts suggest not blowing it all on stereos and vacations. After all, it’s not “free money.” Richards, and most financial experts, advise people to reinvest the money.