Are RRSPs the way to go?

RRSP-or-TFSA Question

With interest rates so low I’m really concerned about contributing to an RRSP. Is it really the best way to save for retirement? I feel it’s just another way for the government to control our spending and still tax us to death. Please…I’m serious about my concerns.

Answer

Yes. RRSPs really are the best way to save for retirement. For most of us, that is.

There are other options, of course. You could choose a job that provides you with a generous defined benefit pension plan—but those are about as easy to find as a Starbucks at the Arctic Circle. You could invest in rental properties and use the income they spin off to pay for the wild excesses of your dotage. Or you could start a business and pay yourself dividends from now until the day they serve crust-less sandwiches at a church basement reception in your honour.

These are all options, but they require an elusive combination of capital, hard work and luck. For most of us, the RRSP is still the best way to save for retirement because it allows us to defer taxes into the future, when we will presumably be earning less, and therefore pay less tax.

An RRSP is just a container for your investments

Remember, an RRSP is not an investment in and of itself. It is a container for investments, like a knapsack is a container for your lunch. You can’t actually invest in an RRSP itself, but you can invest in things like mutual funds, stocks or bonds that go into an RRSP.

So while interest rates are low, that is an issue for the performance of your fixed income investments, not the RRSP itself. You could invest entirely in stocks, which will perform better over long periods of time, but with more ups and downs.

The government can’t control our spending

The government can’t control our spending. Look no further than our horrifying debt-to-income ratio, which now tops 150%. For every $1,000 in after-tax income Canadians owe $1,500. Wowsa. If the government could control our spending I’m sure they would, if only to minimize the risks associated an overextended tax base.

While the government can’t control our spending, they certainly can influence it. Think about cigarettes. Huge taxes on smokes have put the price per pack on par with a Rolex watch, so it is no surprise that fewer Canadians are lighting up. The same applies to the RRSP. The government uses incentives to encourage us to save for retirement. The statisticians in Ottawa know that the social safety net isn’t large enough or strong enough to hold up every 75-year-old from Comox to Cape Breton. People need to save for their own retirement and the RRSP is there to encourage us to do so.

Death and taxes: Taxed to death

You’re also feisty about the level of taxes we pay in this country. I get it. They are among the highest in the world. But again, that is a point in favour of the RRSP. It is one of the very few tax breaks the government offers us—the ability to defer taxes to the future and let the investments inside the RRSP grow tax-free.

And on your way home from depositing your retirement savings, stop by your local MPs office and give them a piece of your mind. They are paid, some would say handsomely, to listen to the concerns of their constituents.

Retirement savings: Time to get to it

My hunch is that you would have preferred a different answer to your question: one that offered up a new, different, and less onerous option than saving in an RRSP. Or perhaps you were looking for a diatribe against government or taxes or aging, anything that would take the responsibility for retirement off your hands. I got nothin’. Sorry.

What I will say is that it is time to get to it. Figure out how you want to spend retirement and then develop your plan to get it, preferably well before the annual deadline looms.

Good luck.