Many who purport to provide financial advice have in the last couple of years suggested that Canadians should forgo their annual contribution to Registered Retirement Savings Plans and instead save the money elsewhere, most likely in their corporations. This “advice” coincides with a perennial warning signal put out by organizations such as the Canadian Federation of Independent Business who note that the vast majority of Canadians make little or no contribution to their RRSPs.
Growing and vibrant societies save. China is nearing economic ascendency because saving, on a multi generational level, is part of their national and cultural ethos. British frugality made financing the Empire possible, and America’s halcyon days were paid for by a society that prized its piggy banks. Today the average Canadian is saddled with too much personal debt, too high a tax burden and unrealistic expectations as to what middle class means in our consumer society. The result is that too many of us do not save for retirement.
Add to this a twist on the whole malaise that suggests that by not saving in our RRSPs we are actually doing ourselves a favour. Once again, some financial advisers, embracing the myopia of a tax only analysis suggest that a large RRSP can only guarantee one thing in retirement, a large tax bill. Armed with their spreadsheet they attempt to scare the future generations of retirees by showing how much tax each year must be paid from a RRSP worth seven figures.
Their numbers are correct; provided of course that the individual makes the contribution and then manages to avoid the investment landmines that they will no doubt encounter. However these advisers miss the truth behind the numbers. They look on projections of predictable growth and assume the conclusion of large accounts. They make one large leap of faith that is that the individual they advise achieves success. They don’t account for potential health issues, litigation, bad legislation, technological innovation that changes the marketplace and above all human nature. Human nature is self interested not best interested. Individuals often make dramatically bad decisions. The result of any of these factors can be to lay waste to the best intended savings plan.
The RRSP (or IPP for those who have their own business) is not the guarantor of a robust retirement but it is a large part of one. By all means save in your corporation, buy real estate, save in your TFSA. The answer is simple save with all the fervour and discipline that it requires. If the average Canadian were to do so and reach retirement with a burgeoning RRSP then, yes the adviser will have been correct, many of the retirement dollars will attract top marginal tax rates. My only response; congratulations. That individual and their family will live a longer, happier life, likely give more to charity, and have helped inspire a healthy savings rate and likely fueled a growing and dynamic Canada.