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| Financial adviser Adrian Mastracci says investors spend too much time on selecting investments and too little time establishing investment strategies. |
By Ray Turchansky
The Vancouver Sun
RRSP Extra Section
Wednesday, February 18, 2004
EDMONTON -- Planning for retirement has never seemed in more disarray.
During 2003, the federal government raised contribution limits of registered retirement savings plans for the first time in nearly a decade.
It also announced that it is looking into implementing a new type of plan for retirement, a tax prepaid savings plan, or TPSP.
Then Malcolm Hamilton, a principal at Mercer Human Resource Consulting, raised plenty of eyebrows in November when he advised a group of corporate pension plan managers: "If you don't have a pension plan, don't start one."
And earlier this year, research showed that defined contribution pension plan sponsors are worried about the threat of litigation, think pension members lack education, and feel only 43 per cent of members will retire when they wish.
With all that as a backdrop, Paul Martin became prime minister of Canada, a job he said he wanted to hold until age 75, and suggested people in other walks of life should also be able to work that long.
Amid all these occurrences ran one common thread -- chances are Canadians will have to take more responsibility to save for their retirement, and if they don't, working beyond age 65 may not be a privilege, but a necessity.
Much has happened since last year's RRSP season.
An increase in RRSP limits, put on hold as the government attacked the debt, finally came to be during last February's budget. The maximum rose from $13,500 to $14,500 for the 2003 taxation year, then $15,500 for 2004 and $16,500 for 2005.
But the condition remains that you can contribute 18 per cent of your earned income for the previous year, minus any pension adjustment due to contributions to a company pension plan, up to the maximum. So you would have to have $80,556 in earned income during 2002 to make the maximum contribution in 2003, and you would need to earn $86,111 in 2003 to make a full contribution in 2004.
The argument persisted that few people would benefit from the changes.
A Statistics Canada report issued last November showed that in 2001, less than nine per cent of available RRSP contribution room had been used up. Not surprisingly, the group with the highest percentage of used-up room was those with annual income greater than $80,000, and even then only 40 per cent had exhausted their contributions.
In October, Statistics Canada reported that for the 2002 taxation year, the number of taxpayers making RRSP contributions had fallen four per cent from the previous year, and the amount of contributions dropped 4.8 per cent.
However, as RRSP season approaches every year, financial institutions elbow each other for media exposure by conducting RRSP surveys and releasing the results periodically.
For instance, the RBC/Ipsos-Reid RRSP survey showed that 38 per cent more Canadians are expecting positive rates of return for their RRSP portfolios this year. The average expected return is 6.3 per cent, compared to an expected return of zero per cent last year.
"Maybe the thing I was surprised at the most was when we asked the question, are you aware what your RRSP return would have been for the past year?" said Brenda Vince, president of RBC Asset Management Inc.
"In 2002, about 20 per cent said they didn't have any idea. And this year it was almost 50 per cent. If we had a feeling people had pretty much quit opening their statements, it pretty much confirms that."
She was encouraged that expectations for returns seemed realistic.
"We're seeing an upward trend in terms of the percentage of people who say they intend to make an RRSP contribution, that had been going down. In the 30-34 age range, about two-thirds said they plan to contribute. In the past three years when we had bad capital markets, people stopped making RRSP contributions."
On another front, a poll by TD Waterhouse Canada Inc. showed that Canadians expect 8.9 per cent returns on their RRSPs this year.
That survey said the average Canadian felt he or she needed to accumulate $530,000 to retire comfortably, a figure that ranged from $347,000 in Quebec to $744,000 in Alberta.
Also, baby boomers aged 40 to 54 felt they need $494,000 to retire on, while Generation Xers aged 25 to 39 thought they need $570,000.
The glaring problem looming ahead is that seven per cent more Gen Xers than boomers say they will have to rely on personal savings or RRSPs for retirement, but 10 per cent fewer Gen Xers than boomers actually have RRSPs.
"They (Gen Xers) grew up and entered the job market under the long shadow of the largest population cohort in Canada's history," said Patricia Lovett-Reid, senior vice-president of TD Waterhouse Canada Inc.
"They've seen the e-business/tech stock bubble burst and investor optimism turn to investor despair. They've read about our aging population and the strain that rising health-care costs will place on our economy."
The expected increased reliance on individual savings for retirement is a direct result of two factors -- the shrinking importance of the Canada Pension Plan as a source of retirement income, and fewer corporations offering company pension plans, or changing from defined benefit to defined contribution plans.
Defined benefit plans guarantee employees a set retirement benefit, with employers bearing more risk.
Again from StatsCan, the percentage of our total retirement program reserves made up of Canada or Quebec government pension plans slipped from 11.1 per cent in 1990 to 5.6 per cent in 2001.
By comparison, 25.4 per cent of 2001 retirement reserves were in RRSPs, and 69.0 per cent in corporate pension plans.
But that was before Hamilton shocked the nation by telling companies to scrap plans for company pensions, blaming class-action lawsuits, uninformed judges and unsympathetic governments for creating a hostile environment for corporate plans.
"There is no opportunity here for the HR (Human Resources) department to be the bearer of good news, because there is no good news to bear," Hamilton said.
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