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By: Tony Wanless
National Post
RRSP Tactics
Monday, February 10, 2003
The RRSP season is reaching its peak, and so is the
annual avalanche of retirement savings hype and advice
-- and guilt.
After all, Canadian investors dumped $28.4-billion
last year into the coffers of financial services companies,
so it is to be expected they would continue to bury
us under advice, suggestions, and plain old sales talk.
For most people, a registered retirement savings plan
is only part of the average person's financial life.
A corollary of this is that RRSP advice is often produced
for the masses when needs and situations are highly
individualized.
Adrian Mastracci, investment
counsel at Vancouver’s
fee-only KCM Wealth Management, says,
“Investing is about setting a course to achieve
a specific return to meet unique long-term goals.”
Those veracities are often lost amid the massive marketing
that goes on at this time of year, creating guilt among
people who are not maximizing their RRSP investments,
advisors say.
"Investing is about setting a course to achieve
a specific return to meet unique long-term goals,"
says Adrian Mastracci, a financial
advisor with KCM Wealth Management
in Vancouver.
"The RRSP has to relate to the total game plan.
You have to ask yourself, 'how does it fit in,' "
he says.
Toronto actuarial guru Malcolm Hamilton, who often
suggests people should not worry about RRSPs until they
are 40 years old or more, agrees most people have other
financial concerns in their lives beyond saving for
retirement. These often include:
Total net worth
When it comes time to retire, the bottom line is how
much you have to live on in total. Total net worth can
be composed of many things, such as RRSPs and pensions,
unregistered investments, real property assets, potential
for other income, cash and, for some people, business
assets that can be sold. Many planners say some people
think too much about RRSPs and ignore other components
of the package.
Taxes
A recent Statistics Canada survey shows personal income
taxes account for the largest chunk, 21%, of the average
Canadian family's annual spending, which is pegged at
$57,730. Since the RRSP system is tied to the income
tax system, Canadians need to understand the nuances
of taxation and act accordingly to increase their personal
profit.
For example, as more people launch their own businesses,
incomes can fluctuate wildly from year to year. The
RRSP system can be used to smooth out the peaks and
valleys and make taxation more consistent.
In years of low income, the self-employed individual
can withhold contributions, which builds more contribution
room and subsequent tax relief. In years of higher income,
contributions can be maximized to generate high tax
refunds.
Housing
The same survey found shelter accounts for 19% of family
spending -- the second highest. Most Canadians insist
on attacking their mortgages before saving for retirement.
For many people, the family home forms the core of the
retirement plan.
Advisors generally counsel against concentrating exclusively
on the home -- putting all eggs in one basket -- but
recognize that for most people it is far more important
than retirement savings. Therefore, they usually suggest
a straddle technique: Save within RRSPs, and use resulting
tax refunds to pay down mortgages.
Income and family
Most families worry foremost about housing, raising
children and building lives. Mr. Hamilton says these
concerns often make middle-class earners poorer than
they should be in
retirement.
For these people, registered education savings plans
(RESPs) are more important than RRSPs: Investing more
in an education increases their income potential. Increasingly,
older workers who plan to start new businesses in semi-retirement
feel they need an education upgrade. Such investing
generates expense-and-return ratios that could arguably
equal or surpass those of a simple RRSP.
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