Over the last few weeks we’ve noticed a considerable surge in people headed to our site to check out topics surrounding RRSPs and TFSAs. During the same time period I’ve heard several of my co-workers talking about RRSPs and how “it’s that season”. Finally, in some of the financial sections of the newspapers that geeky people like me browse, there have been both some good and not-so-good articles written about Tax Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). The conclusion I’ve come to is that there is still a ton of confusion and misinformation out there (much of it being encouraged by our illustrious financial services industry) surrounding the topic of retirement planning. I can already hear some of the Ph.Ds in personal finance out there in blogland cringing at the thought of ANOTHER RRSP article, but I think it’s worth clearing up a few things for people that aren’t geeks that read the finance section every day.
No Cookie Cutters In Financial Planning
The first thing you should know about retirement planning is that no one knows or can tell you how much money you will need at a certain age in order to retire. A common practice this time of the year is for financial advisors to tell their clients that they need to have two million dollars to retire at 65. They then show a chart with some math that doesn’t exactly lie (… lies, damned lies, and statistics) but misleads the client into thinking they need to make major sacrifices (not by itself a bad thing) in order to put money into their preferred mutual fund RIGHT NOW (almost always a bad thing). Here is the truth of the matter: No one knows when you’ll die, what sort of life you’ll want to live as you age, or several other variables. A good financial adviser (I’m hugely bias to a fee-only adviser, but that’s a debate this site has seen far too many times) will sit you down and explain these variables and look at a few different probably scenarios in order to give you a better overall picture of what you need to invest. Don’t get panicked into making rash decisions about your retirement savings because of a carefully orchestrated marketing campaign that seeks to get you to do just that!
Next on my list of pet peeves is the explosion of TFSA vs RRSP articles out there (I should probably guiltily admit that we even have our own on Y&T) that categorically recommend one over the other and then give a bunch of cherry-picked examples about why this is the case. Again, in layman’s terms, this doesn’t have to be that complicated. Here is the nuts and bolts of what most people care to know. Both of these investment vehicles are good. Neither are investments in and of themselves (the sentence, “I should really buy some RRSPs this year” is one of those things that irrationally gets under my skin), and as long as you’re saving for your retirement and have some clue about asset allocation, your 90% of the way home. As far as which one to pick, you can truly educate yourself about the matter, or you can just keep it simple. The basic idea is that the taxman is going to get his bone sooner or later. If you believe your taxable income for 2012 was lower than it will be when you retire, then you’re better off in an TFSA. If you think you made more this year than your likely to make in retirement (including RRSP withdrawals), then you’re better off in an RRSP. That’s it (in a nutshell). In my case, as a young teacher, I would actually be a great case study on someone who would benefit by putting money in their TFSA before their RRSP (due to the substantial pension I will receive – in theory anyway). The only problem is my ridiculous USA taxation situation.
The only thing I’m going to add in the RRSP vs TFSA debate (and you can skip over this if you aren’t into financial minutiae) is that few people consider the matter that tax rates might go up between now and when they retire. I’m 25 right now. Between the present time and when I retire (hopefully in thirty years or so) Canada’s population is going to go through some major demographic shifts, and countless world events are almost certainly going to squeeze governments’ budgets. What are the chances that governments in Canada will further decrease taxes from where they are today? I would say almost no chance, but that’s just my semi-educated opinion. I think there is a much higher probability that income tax rates could go up. In that scenario, the TFSA has to get some extra consideration since your money is yours at that point and should not have any further tax obligations. This is why I think about renouncing my American citizenship daily btw.
“Celebrate” All Year Round
In closing, just keep things simple as you head “into the season” (the idea that you should only save for your retirement once a year is also something that gets me). In a best case scenario you should be looking into making periodic contributions all year round, with the intention of retirement savings just becoming routine. I’m hoping that if we can get more education out there at younger ages (in school) more people will develop solid savings habits, and less people will be apt to be intimidated by such a well-oiled industry that aims to profit from their naiveté.