This article will be the first in a series about a few of the various types of investment strategies that are available to Canadians looking to plan for their retirement.
It’s that time of year again…RSP Season; you may have already begun to see and/or hear the ads and have started to think about making your annual contribution (that is, unless you’re already making pre-arranged contributions, which is generally the easiest and best way to sock money away). There are a number of functions in holding an RSP, but a couple of big ones include the following:
- They allow you to save money, on a tax-deferred basis, for later in life. The reality is that most Canadian taxpayers will likely end up in a lower tax bracket when they retire (or even the same tax bracket); meaning the tax-deferral will help them to reduce the amount of tax that they have to pay
- They provide a means of reducing the tax payable on last year’s income
That said; there are other reasons to invest in an RSP, including but not limited to the following:
- Out of sight, out of mind: People tend to be more reluctant to withdraw funds from their RSP than had the funds been sitting in a more easily accessible account
- RSPs have applications beyond just saving for retirement: Beyond their traditional function, RSPs can also be used for a number of pre-retirement purposes. For example, you can use the funds in your RSP towards a down payment on your home (for details about the Homebuyer’s Plan click here), or as means of helping fund your education (for details about the Lifelong Learning Plan click here)
- Ambiguity surrounding Pension Availability: Over the next two decades, it is expected that we will see large numbers of people retiring; this situation has the potential to create significant strain on our pension system. While we are by no means suggesting that the CPP won’t be around; relying exclusively on it may not provide you with the amount of monthly retirement income required to have the type of retirement you are hoping for. Whether an RSP is your primary means of retirement income or a complimentary source, it is a good idea to have more than one iron in the fire.
But what about paying off debt first? Paying off debt at the expense of investing is a common strategy; however, what people need to realize is that if the majority of your net worth is tied up in the equity in your home, in order to gain access to those funds you need to sell your home (and unless you’re planning on moving in with one of your children you’ll need to buy or rent a new place). The best strategy considers a plan that aims reduce debt AND increase savings. Talk to one of our advisors to discuss a solution that works for you.
P.S.: I know you’ve heard it before, but when it comes to investing, time is of the essence…start investing in your RSP at an early age. While you will have an opportunity to “catch up”, the longer you wait the harder it will be to have the amount of funds you require for the retirement you want and deserve.
Note: We do recognize that each person has their own unique situation and considerations. In the very near future we’ll be providing info on other strategies including TFSAs, Annuities and Life Income Funds.