Are RRSPs enough to generate lasting income in retirement? - The Globe and Mail

Lower-income clients (less than $50,000 annually) may not get a significant tax benefit from an RRSP, one advisor says.daoleduc/iStockPhoto / Getty Images

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The majority of Canadians believe they need $1.7-million to retire confidently and comfortably, according to a new survey from Bank of Montreal. Yet, the survey also reports that “the average amount held in RRSPs (registered retirement savings plans) nationally is $144,613, a 2 per cent increase from 2021.” That begs the question – are RRSP contributions enough to retire on?

“I tell my clients that it depends,” says Ross Ferrier, investment advisor with Commerce Valley Financial Group at CIBC Wood Gundy in Thornhill, Ont. “If you’ve never been a saver and you’ve never utilized an RRSP regularly, there’s quite a possibility that the RRSP may not be sufficient.”

On the other hand, there are some people who contributed to their RRSP religiously and will have more than sufficient funds available to them in their RRSP, he adds.

Mr. Ferrier says there are many factors to consider when looking at a client’s retirement savings as it’s a very personal decision. But, it’s important to discuss the client’s ideal retirement age, current spending, ideal retirement spending, and develop a plan to reach those goals.

“You also have conversations with clients toward the end of their contributory life,” says Mr. Ferrier, adding that those conversations change the closer a client gets to retirement as many people haven’t maxed out their RRSP contributions every year. Whether they should when they approach retirement is something to talk about with them.

“You say, ‘Maybe it’s time to stop these contributions because you could be making them in the latter years of your working life only to be removing them and paying the tax immediately on that money,’” Mr. Ferrier says.

“So, maybe another way of investing makes more sense if you’re a saver, like the TFSA (tax-free savings account), if you haven’t maximized your TFSA room.”

The client can then remove those funds tax-free and delay even further the withdrawals from the RRSP, he adds.

The benefits of using TFSAs

Indeed, TFSAs are something many advisors discuss with their clients as a retirement savings option because there are many benefits to this vehicle, says Mike Wilson, senior investment advisor, and portfolio manager with M.R. Wilson and Associates at BMO Nesbitt Burns Inc. in Calgary

“For a TFSA, you receive room every single year. For 2023, the amount is $6,500 and you don’t ever lose the room you accrued,” he says.

“For a Canadian who was over the age of 18 in 2009, the lifetime room is $88,000. So, if you’ve never [used] it, there’s a pretty significant pool there.”

It can also be helpful if the client has a significant other who hasn’t used up their TFSA room either, he adds.

But Mr. Wilson says he also warns clients about overcontributing to their TFSAs because the penalties can be steep – about 1 per cent a month. To avoid this issue, he suggests clients consult the Canadian Revenue Agency (CRA) website to check each year’s TFSA limit and rules surrounding the limits.

“Bottom line, it gives you flexibility,” he says. “If an emergency pops up and you do need to pay for it, you can withdraw funds from your TFSA without a penalty.”

That room isn’t lost, but clients won’t get it back until the next calendar year, he adds.

‘Retirement is evolving’

Meanwhile, Jackie Porter, certified financial planner and advisor with Carte Wealth Management Inc. in Mississauga, says the concept of retirement is a relatively new one and has only been around for 50 years. It’s also one that’s changing as people decide what they want out of those later years and consider the costs connected with it.

“This idea of retirement is evolving, and the industry will need to continue to evolve as we work through what it means [to] retire and live another 30 years,” she says, adding that means bringing up conversations about health care costs, not having retirement plans from employers and ensuring clients understand that the onus is often on them to prepare for this part of their lives.

There are also conversations with clients that need to happen around the limitations of RRSPs, Ms. Porter says, especially when it comes to taxes.

For example, clients with an income of less than $50,000 may not get a significant tax benefit from an RRSP, she says.

“It may not be the ideal investment account for them and they will have to pay taxes later, which may lead them to miss out on benefits for low-income individuals when they’re in retirement as they will have to report 100 percent of the income they withdraw from RRSP,” Ms. Porter notes.

But the story is different for those in a higher income bracket, who may want to use their RRSPs as a tax shelter. Still, higher-income earners can lose out as the contribution limit maxes out and they may want to shelter more than the limit allows to help meet their retirement goals. For example, the RRSP contribution limit for the 2022 year is $29,210.

“So, they will need to consider other investment vehicles as well such as a TFSA or non-registered account,” she says. “However, they really have no choice than to make an RRSP contribution, given the marginal tax rate.”

For example, clients in the highest tax bracket pay 33 per cent in federal taxes for any amount they earn above $221,708, she adds. (The provincial amount varies.)

“Better to contribute to an RRSP and get a tax credit based on your marginal rate and reduce your taxes instead of paying the CRA and losing out on money that could have been invested,” Ms. Porter says.

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