RRSP ages and stages

Everyone knows it’s RRSP season, but what’s less obvious is how to best direct your contributions over the years. Different ages and life stages call for different strategies.

There’s an overarching theme, though: anything you can put toward your retirement is a good thing.

“When it comes to contributions, it’s a journey, not a sprint,” says ‎Wade Stayzer, vice president of retail banking and investment services at Ontario’s Meridian Credit Union.

“The sooner you start contributing to your future savings, your nest egg, the better off you’re going to be in the long run.”

Single/young professional

There’s a reason you don’t see many 60-year-olds longboarding: it’s young’uns who are better able to take the associated risks. Same goes for finances.

“All investments hinge on three basic principles to grow money: How much you invest; How long you invest for; and the rate of return,” explains Bettina Schnarr, investment advisor with HollisWealth, a division of Scotia Capital Inc., in South Surrey, B.C.

“Part of the return is the risk-reward theory that says the higher the risk, the higher the potential reward.

“Generally, the idea is that the younger you are with fewer responsibilities the more risk you can handle because you’ll still have time to recover should you lose money,” she says.

This period is also a time to build good habits, Stayzer says: doing things like paying yourself first, paying off debts (such as student loans), learning to live within your means, and understanding your risk tolerance when it comes to investments.

“You want to make sure your investments match your stage of life, and you can take more risks when you’re younger,” Stayzer says. “If you’re in your 20s investing in a 2 per cent GIC, you’re not getting the potential upside that you deserve.”

Married with or without children

Now’s the time to save for major purchases and to continue paying down debt. It’s also the chance to take advantage of government initiatives like the First Time Home Buyers’ program, which allows you to use up to $25,000 of your RRSP contributions for a down payment, tax free.

“Have plans in place to achieve your goals as opposed to running out and racking up credit-card debt,” Stayzer says. “If you get raises and bonuses, put that away or pay down debt.”

This is also a time when you want to see whether spousal RRSPs make sense for you. A form of income-splitting, they’re used when one spouse earns significantly more income than the other. The retirement income is shifted into the hands of the lower tax-bracket spouse, with the higher-income earner contributing to the plan and claiming the tax deduction.

New parents will also want to consider Registered Education Savings Plans (RESPs) for their kids’ sure-to-cost-a-fortune post-secondary studies.

Mid-Career

Typically these are your peak earning years. “Generally speaking, put what you can into RRSPs, although there are exceptions to this,” Schnarr says, noting that Tax-Free Savings Accounts (TFSAs) are another resource worth maxing out. And continue paying off debt, she advises.

Early Retirement

The goal is to be self-sufficient at this point, although more and more Canadian seniors are facing debt, including hefty mortgage payments.

“Check with a tax consultant to see how much you should be withdrawing from your RRSPs, converting all or part to RRIFs of course, because you don’t want to leave yourself vulnerable to bigger taxes and OAS clawbacks when you’re 71 and forced to convert all of your RRSPs to RRIFS,” Schnarr says.

Golden years

During this period, the name of the game is preservation of capital. In other words, low-risk investments are where it’s at. Tax-efficiency is vital too.

Some of the options for investing during this phase, according to Schnarr, include capital class funds, tax-efficient systematic withdrawal investments (TSWPs), annuities, whole life and universal life insurance policies, and segregated funds. However, they all come with tax implications so get advice from a qualified professional you trust.

And don’t forget to live a little.

“If you’re mortgage-free and you’ve put all the pieces into place, enjoy the fruits of those efforts,” Stayzer says. “This is what you’ve worked so hard to achieve. When you get to those years where you don’t have to be running into the office every day, enjoy the time with your children and your grandchildren.”