Life / Money

Make RRSP contributions based on long-term goals

(Special) - With a total of some $700 billion in unused contributions in their Registered Retirement Savings Plans (RRSPs) Canadians have a lot of catching up to do when it comes to saving for their retirement.

But is maxing out your RRSP always the best thing to do?

"Before you go dumping a whole bunch of money into your RRSP you really need to go back to your financial plan and look down the road to see what your retirement will look like in terms of what you want to do, your sources of income and living expenses," says Mark Parlee, a senior wealth adviser with Beaches Financial Group of the Investment Planning Counsel.

Financial advisers and planners say it is important for people to think about what kind of lifestyle they want in retirement: where they want to live, how they want to spend their time and with whom. Knowing the kind of lifestyle you want can help you customize a plan that will ensure you have the savings and income to do what you want in your retirement years.

Younger people these days generally are using the Tax Free Savings Account (TFSA) to save money because their incomes are often too low to take advantage of the tax deductions of contributing to an RRSP. As their careers develop and their incomes increase, they then can begin contributing to their RRSPs.

"Younger people have a hard time maxing out their TFSAs let alone their RRSPs," says Parlee. "People in their 20s generally don't start putting money away for their retirement until later in life, but it's never too early to start planning for the future. People need guidance and a financial plan can provide that."

When approaching, or in, retirement it's important to know your income from all sources because it can affect your ability to receive government-sponsored programs such as the Old Age Security (OAS).

The government imposes a special tax, or clawback, on your OAS payments if your net income for the year exceeds a certain annual threshold. For 2015, the threshold was $72,809. The amount of the clawback is equal to your OAS payments or 15 per cent of the amount by which your net income exceeds the threshold, whichever is less.

Income sources in retirement typically include personal savings, employer-sponsored pension plans and government sources.

Many Canadians also hope to use money from their real estate holdings such as homes, condominiums and cottages to help fund their retirement income.

"You have to be a bit cautious about this," Parlee says. "You may have a house in Toronto that might be worth a million or more, but that's probably what you're going to have to pay to find something else suitable in the city. You may have to downsize or retire outside of the Greater Toronto Area to pocket much money. We advise clients to be cautious and build some gains from your principal property into your plan, but it needs to be part of your overall portfolio. You don't want to put all your eggs in one basket."

A recent study by BMO Wealth Management found that housing is the single biggest monthly expense Canadian retirees have, followed by living expenses like bills, clothing and transportation, plus travel costs and medical expenses.

On average, Canadians spend about $2,400 a month to live in their retirement. Those in the Atlantic region spend the least per month at $1,975 while Albertans spend the most at $2,648 each month.

The survey also found that 25 per cent of retirees are spending less money than expected but the same percentage said they were surprised to find that their savings weren't as adequate as they had expected. About 21 per cent said they were spending more than they had anticipated.

That's why it's important to make sure you use the money you've been saving for years for your retirement wisely.

"It's never too early to start putting on paper your plans for the future," says Parlee. "You don't usually set out on a big road trip by just getting in the car and driving off without a map or some destination in mind. The same should apply to your retirement. That's what a plan does — it gives you a map to guide you."

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2017 Talbot Boggs

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