Why maximizing your RRSP contribution simply isn’t enough
Today is the RRSP deadline, so did you max out your contribution room?
If so, congratulations, you’re already doing far better than the 40 per cent of your fellow Canadians who don’t spare a penny for retirement.
But that’s not enough. With the average duration of retirement expected to reach 30 years and employer RRSP top-ups getting smaller and rarer, even conscientious savers are unlikely to have enough for a comfortable retirement unless they start investing and doing so more aggressively, financial advisers are increasingly telling their clients.
Canadians leave a whopping 60 per cent of their savings in cash, according to an extensive 2015 survey by financial planning and investment management firm BlackRock. And only 19 per cent of the typical Canadian portfolio is made up of stock holdings.
It isn’t hard to guess why that is the case. Cash is immediately accessible and the stock market is complex and risky.
Consider this: the last time the Bank of Canada’s benchmark interest rate was above 3 per cent was in 2008.
Meanwhile, the S&P/TSX Composite Index has risen by roughly 25 per cent in just the last five years. And in the U.S., the Dow Jones Industrial Average has gained more than 60 per cent over the same period.
You don’t have to be an investment pro to capture those stock market gains. The rise of exchange-traded funds (ETFs), which track the performance of stock market indexes, means that even novice investors can do at least as well as the broader market.
The difference ETFs can make to the size of your nest egg is significant. If ETFs existed 20 years ago (they didn’t) and you had put $10,000 in an ETF fund in 1996, it would have grown to over $23,000 by the middle of last year, according to MoneySense magazine.
RRSPs are also a great place to hold U.S. stocks, as neither the CRA nor the IRS will tax U.S. dividends held inside an RRSP. (This isn’t true for TFSAs, which aren’t covered by the Canada-U.S. tax treaty. While the CRA won’t touch U.S. dividends held in a TFSA, the IRS will charge a withholding fee of between 15 and 30 per cent.)
Of course, how much of your portfolio you should allocate to stocks ultimately depends on your risk tolerance.
And for extremely nervous savers, it might still make sense to skip stocks entirely. After all, if the gyrations of the market keep you up at night, it isn’t worth the suffering.
Still, when weighing risks, Canadians should take into account the very real risk that they won’t have enough to retire even if they use up all of their RRSP contribution room every year.
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