When Canadians think of investing for retirement, they often think of RRSPs as being one of the best ways to help them reach their retirement savings goals. After all, RRSPs let your savings grow tax-deferred, plus they bring considerable tax deductions, resulting in tax savings, which you can also add to your RRSPs.
However, while RRSPs undoubtedly provide a very tax-efficient way of investing for retirement, they are only one piece of the retirement plan puzzle. A comprehensive financial plan will take into account a whole range of considerations, including income from government pensions, work pensions, registered and non-registered savings, as well as how much you’ll need to save to provide the kind of retirement you want.
There are various alternatives to RRSPs when considering where to invest for retirement, and it’s also essential to consider all aspects of your financial life to have an air-tight retirement plan.
Let’s take a look at what you should consider beyond RRSPs and investing for retirement.
A good alternative to RRSPs
The maximum you can contribute to an RRSP for yourself and/or a spousal RRSP in 2022 is 18% of your earned income, or $30,780, whichever is the lowest amount, minus any pension adjustment. While many working Canadians would struggle to afford to save 18% of their income, there are others who can afford considerably more than this amount. For those people, there are several additional options.
Another good investment vehicle for retirement is a Tax-Free Savings Account (TFSA). While your contributions won’t deliver an immediate tax break, your investments will grow completely tax-free. The annual limit for TFSA contributions for 2022 is $6,000, but if you have unused contribution room from previous years, or made withdrawals from your TFSA account in the past, you may be able to contribute more.
The total TFSA contribution room from 2009 (when TFSAs were introduced) to 2022 is $81,500, so you may be able to save far more than $6,000 in a TFSA this year. You can find out how much contribution room you have by signing into your My Account or your MyCRA.
A better retirement planning option for lower-income earners
If you’re currently in a low tax bracket or expect to be in a higher tax bracket in retirement than today, investing in an RRSP may not be as beneficial for your retirement investment plan. A key benefit of RRSPs is the tax break you get when you make a contribution, however you will pay tax when you withdraw the money when you retire. So, if your income when you retire is the same or higher than when you contribute, there may be less or no tax benefit in the long run.
Investing instead in a TFSA could be your best investment for retirement, at least for now. You won’t receive an immediate tax break, but your savings will grow tax-free, and a TFSA is far more flexible than an RRSP. You won’t pay tax when you withdraw from it, you can take money out whenever you need it and any withdrawals are added to your total contribution room for the following year (unlike with an RRSP, where you lose contribution room with any withdrawal).
This doesn’t by any means need to be a lifetime investment plan for retirement. Once your current income rises to a level above your probable retirement income, investing in an RRSP could become a more tax-efficient option.
Why you need to consider tax planning when investing for retirement
There are several tax-efficient strategies for retirement that can help your savings last longer and allow you to retire more comfortably. These strategies include:
- Optimizing the time you start collecting CPP/QPP and Old Age Security
- Sharing CPP/QPP with your spouse
- Contributing to spousal RRSPs
- Using spousal loans
- Generating tax-preferred income from non-registered investments (savings that aren’t in an RRSP or a TFSA)
Your IG Consultant can help you plan your retirement with these tax strategies in mind.
When to pay off your mortgage
While many people pay off their mortgage long before they retire, it can sometimes make sense to carry a mortgage into retirement. This can be the case when mortgage interest rates are low and investment returns are high. In this situation, it may make sense to put more money into investments, while continuing to pay interest on your mortgage. Since investments returns and interest rates are not guaranteed, this strategy should be carefully assessed with the help of your IG Consultant.
It would also make more sense for your retirement investment plan to pay off high interest debt before paying off your mortgage, especially when that interest is not tax deductible.
Planning for the unexpected
When you’re investing for retirement, even the best plans can be derailed by unexpected events. When it comes to large expenses, an emergency savings account can help keep your retirement planning in check. Advisors generally recommend you save between three to six months’ worth of expenses in your emergency account, but this should be based on your personal circumstances.
Insurance is also essential to maintain your family’s lifestyle both now and in retirement. Life insurance will help your family to pay bills and the mortgage/rent should you pass away, while disability and critical illness insurance can help cover lost wages and medical expenses until you recover.
While most of us know the importance of investing for retirement, estate planning often goes overlooked. By planning ahead, you and your spouse could avoid unnecessary taxes when one of you passes away. Making a robust will and choosing beneficiaries wisely will help you and your family to keep on track financially.
Start going beyond simply investing for retirement
Your IG Consultant will be able to draw up a robust retirement plan that takes into account all of the points and strategies laid out above. They’ll help you manage the risks of retirement, keep your savings intact for longer and create a retirement income plan to provide for the kind of retirement that you’ve always wanted. Talk to your IG Consultant today: if you don’t have an IG Consultant, you can find one close to you here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).