The article “Don’t Set It and Forget It: How Your RRSP Strategy Should Change As You Age” was originally published on The Financial Post on January 13, 2016.
A registered retirement savings plan is an ever-evolving tool. It serves different purposes depending on your age and stage. To help you navigate your options and how they change with age, here is some general advice decade by decade.
A tax-free savings account (TFSA) may be a better alternative than an RRSP. They can be more flexible for making deposits and subsequent withdrawals.
The conventional wisdom to invest for the long-run as a young adult might be inappropriate. Chances are the money you save in your 20s will be used in your 20s or 30s to buy a car, pay for a wedding or as a down payment on a house. Savings in your 20s rarely turn into retirement savings — all the more reason to think twice about RRSPs.
Mutual funds have long been the investment vehicle of choice for 20-something investors, but keep your asset allocation more conservative — possibly a bias towards money market, bond or conservative income or balanced mutual funds.
Most people start to become established in their 30s — both personally and professionally.
If you are considering buying a home, the Home Buyer’s Plan (HBP) allows you withdrawals up to $25,000 from your RRSP to buy or build a qualifying home. So an RRSP may be a reasonable short-term savings option, despite the typical “retirement” focus.
Chances are you are getting established in your career and may be working for an employer with a group RRSP or a defined contribution pension plan (similar to an RRSP). Make sure you are taking advantage of retirement plans available from your employer, including any potential employer matching contributions.
Until recently, young investors with modest savings were limited in their investment options and generally confined to high-fee mutual funds. The emergence of robo-advisers in Canada in the past couple of years is filling a much-needed void for this cohort with good portfolio management at a low price.
People tend to enter their prime earning years in their 40s and, given Canada’s graduated tax rates, that means high taxes as well. RRSPs are arguably Canada’s best tax shelter and contributing can help shift income from these highly taxed years into a lower tax bracket when you take RRSP withdrawals in retirement.
In your 40s, you are old enough to know better than to ignore your finances, but young enough to still make a difference. Make sure you take advantage.
You should probably have a healthy exposure to stocks in your portfolio, especially in this low interest rate environment. A financial adviser for either your investments or your financial planning (or both) could be a good investment.
Retirement starts to become more of a reality in your 50s. Some people are lucky enough to achieve financial freedom at 55. Others are downsized in their 50s and retirement happens sooner than they might otherwise have planned. Either way, it is important to consider retirement planning in your 50s in order to get a good sense of what the near-term future holds.
Frequently, you still have 10-20 years before you are going to draw much or anything from your RRSP — stocks should generally still represent a good portion of your RRSP savings.
If you are still working in your 60s, you should consider whether or not you are working because you want to or because you have to. If you have to work, you cannot count on working forever due to health and hiring considerations. You are in the home stretch as far as potential RRSP contributions.
If you are not working, consider early withdrawals from your RRSP. You may not need to take withdrawals until age 72, but it may make sense to take withdrawals early in order to smooth your income and avoid a clawback of your Old Age Security pension, which may result if your income is too high due to RRSP withdrawals after the age of 65.
If you have maxed out your RRSP, consider which investments to hold in your RRSP versus other accounts. It may be advantageous to hold interest-bearing investments in your RRSP (cash, bonds, GICs) and stocks in your non-RRSP accounts (TFSAs and non-registered).
By the end of the year that you turn 71, you need to do something with your RRSP. The majority of Canadians convert their RRSP into a Registered Retirement Income Fund (RRIF) and start taking the government-mandated annual withdrawals each year. You have to take a minimum withdrawal each year from your RRIF — depending on cash flow needs, some people take more than the minimum.
It is important to structure your portfolio based on your anticipated withdrawals, so you may need to begin a bias towards fixed income or make sure you have easy access to cash to fund your minimum required withdrawals.
Annuities are another option for your RRSP, but the problem these days is that buying an annuity is like buying a 20-year GIC — at today’s low interest rates it can be quite expensive.
Advice for all ages
RRSPs are a tool. When you are really young, they might actually be used towards a home downpayment instead of retirement. When you are middle-aged, you need to use them wisely to ensure that they are there when you need them in retirement. And in your golden years, consider options like early withdrawals or annuities, while simultaneously planning for withdrawals, but investing for longevity.
Most Canadian financial wealth is in RRSPs. You cannot just pay attention to your RRSP once a year during RRSP season. In much the same way doing the right little things early on can pay dividends in the long run, the same can be true of doing the wrong things year after year.