Canadians are withdrawing $1 for every $3 saved in their RRSP — here's what that's costing your retirement

But in recent years, a troubling trend has emerged: Canadians are under-using their RRSPs. Even worse is that more Canadians are starting to withdraw from this retirement savings account during their prime earning years — undermining the very benefits the vehicle offers.

Fewer contributors and premature withdrawals

A report published by Canadian tax expert Jamie Golombek (1) highlights fresh data from the C.D. Howe Institute showing that Canadians are withdrawing around $1 for every $3 contributed to an RRSP or a similar tax-advantaged plan, such as a TFSA.

And as it turns out, the biggest culprits for early withdrawal are Canadians between the ages of 45 to 59. This means that this pre-retirement cohort is tapping into their savings early, rather than keeping them for the years when they’re no longer earning an income.

That’s not the only alarming trend when it comes to RRSPs. According to the most recent data from Statistics Canada, contribution rates to RRSPs are declining (2). In 2022, only 21.7% of tax filers made an RRSP contribution, down from 22.4% the year before (the downward trend resumed after a temporary pandemic-related bump).

Moreover, participation varied dramatically by income: In 2022, roughly 1.7% of tax filers with incomes under $20,000 contributed to an RRSP, compared to about 66.2% of those earning between $200,000 and $499,999 (3).

This data illustrates both the declining participation and the uneven usage of RRSPs across income groups, but it also reinforces the risk inherent when people both under-contribute and withdraw too early.

Start contributing today with an EQ RRSP

If you’re already starting to sweat about under-contributing to RRSPs and funding your golden years, you could prepare yourself early by opening a no-fee RRSP high-interest savings account with EQ Bank.

A high-interest RRSP savings account has the benefit of mixing tax-deductible contributions and tax-deferred growth with higher interest rates, allowing your savings to compound and grow faster.

For a limited time, you can also get up to $200 cash when you add new deposits to your EQ Bank RRSP account.

Then, at the end of the year, it could be a good idea to assess the state of your high-interest RRSP to plan out your investments for the following year.

Save time on your savings

But not everybody has the time to keep track of their investments and savings portfolios. That’s why there are more hands-off alternatives to saving for retirement.

Whether you’re five or 15 years away from retirement, Wealthsimple Portfolios makes it easy to build a nest egg that can help reduce your reliance on government benefits later on.

Their pre-built portfolios are tailored to your retirement goals, risk tolerance and investment horizon, so whether you’re planning for a comfortable early retirement or steady growth over the long term, there’s a portfolio designed for you.

You can even automate your contributions inside an RRSP or TFSA and let Wealthsimple handle the heavy lifting: managing risk, rebalancing your portfolio and reinvesting dividends.

Trusted by more than 3 million Canadians, Wealthsimple manages over $100 billion in assets and provides $1 million in eligible coverage through the CDIC for chequing accounts and CIPF for investments. Plus, as licensed fiduciaries, Wealthsimple’s advisors must put your financial interests first.

It’s a simple, low-fee way to stay invested without constantly watching the markets. And when you open your first account and deposit at least $1 within 30 days, you’ll get a $25 welcome bonus.

Visit Wealthsimple for up-to-date terms and conditions.

Missing out on compounding and retirement security

Why worry about withdrawing early in the first place?

The answer is simple: Because the very value of an RRSP lies in long-term growth and deferral of tax until retirement (when your tax rate is typically lower, as you earn less from non-employment resources).

If you contribute early, ride out decades of market returns and delay withdrawal, the compounding effect can be substantial. But if you delay contributing — or worse, withdraw early — you lose years of growth, erode your tax-deferred base and undermine retirement security.

Golombek points out that even withdrawals which seem innocuous, such as using the Home Buyers’ Plan, can derail the long-term power of the account (4). When you withdraw before retirement, the tax-deferral benefit collapses and you replace potential decades of growth with a taxable event.

Behavioural finance meets investor discipline

The reasons behind these trends are at once understandable and worrying from an investor-behaviour perspective. On the one hand, Canadians face competing priorities: mortgages, kids, debt, day-to-day cost pressures — all of which can tempt withdrawal. On the other hand, early access to an RRSP feels convenient, particularly if faced with lower earnings or less income due to family circumstances or job loss.

But discipline is key. As Golombek points out, once you tap your RRSP in your 40s or 50s, you may be sacrificing a decade or more of growth.

For example, if you were to contribute $10,000 at age 35 and never withdraw it, that initial sum could grow to nearly $43,200 by age 65, assuming a real return of 5% per year (after inflation). However, withdraw it today, and you lose not just the principal but all future growth — tax-efficient growth, no less.

And fewer contributions today means less base for compounding tomorrow. With only about one-fifth of tax filers contributing to RRSPs in 2022, many Canadians are simply missing out on having their money earn money.

How to get back on track

Even with a disciplined strategy in place, you may still worry you’re being left behind when it comes to investing for your retirement.