BY: FAZAAD BACCHUS
In the olden days, there were no such thing as RRSP, parents made children and hoped that in the end one of them will take care of the aged until death eventually comes. While this is still happening, most people are saddled with taking care of their parents as well as their own children. Our new Canadians are trying to build their lives here, with an overwhelming number of bills which makes saving for retirement a virtual impossibility. Under these circumstances, it is easy to see why one may put off saving, but saving for a good retirement is a critical part of your life’s planning. The only money that will be there when you get there is what you send ahead.
The first misconception I would like to deal with, someone will take care of me. You can no longer depend on this philosophy. The younger generation has no interest in taking care of their aged parents neither are they qualified to do so. As parents live longer and go through a longer old age period, it would be unfair to ask your children to take care of you during those critical years. It is imperative that there be some sort of savings plan where you have put aside money to pay for the services you might require during that time.
The next is that it’s useless putting money in a RRSP because the tax that I save now will only go back to the Government when I retire; this is not how it is meant to work. If you are earning less that 12,000 per year, you should not save in a RRSP but rather a TFSA. A RRSP is meant to benefit the higher income earner. For example, someone in the 50,000-annual bracket will have a marginal income tax rate of about 30%. This means that for every $1000 he invests the Government will give him a tax rebate of $300. When he reaches retirement age he should be in the lower tax bracket, therefore for every $1000 that he withdraws, he will repay about $160.
Another is thinking that because you have maxed out your RRSP room that there isn’t much you can do. Since the Government introduced the TFSA in 2009, many individuals have been using it to supplement their retirement savings. Cumulatively the contribution room on a TFSA will be over $50,000 this year. There is no tax on withdrawal, but be careful as this is also a temptation to make easy withdrawals when the money could be meant for your retirement.
This is one of the biggest mistakes that I have come across. I have seen clients who are fed up with the market and because their funds have been falling, decided to cash out to save further loss. This is a very easy situation to correct, but it requires sitting down with a qualified financial advisor who can guide you through what’s happening with your portfolio and what choices are available to you. When you cash out in any given year, you add that amount to your regular income and increase your taxes accordingly. It’s a major loss for you; you should be withdrawing a time when your regular income is at its lowest or none at all.