TORONTO – The pressure of RRSP season can be relentless, but advisors suggest young Canadians think carefully before they pile money into the long-term savings plan, especially if they’re in unstable jobs or have lingering debts.
The instability of the modern workplace has made it more complicated than simply tossing money into a savings plan, locked away for years to come.
People in their mid-20s to early 30s are increasingly working part-time or contract jobs that leaves them with an uncertainty about the future that would have been unheard of a few decades ago.
So the advice from financial advisors is to weigh whether it makes sense to contribute to an RRSP given your financial situation, especially if you have student loans or a home mortgage.
Hamilton resident Rikesh Modi faced that question when he graduated university with a commerce degree, just as the U.S. descended into the financial crisis.
“Trying to get a finance job was quite difficult,” Modi said. “More companies were letting go of people than were hiring.”
So Modi took a job at a commission-based stock trading company, and worked part-time on the side to help steady his fluctuating income. Even then, it wasn’t enough to consider saving for retirement.
“My parents’ generation was very much about the idea that you go to school, get a job, and it’s very stable,” he said.
“Nowadays … those jobs are few and far between.”
More young Canadians are struggling to find stable jobs to help pay school debts. The Canadian Federation of Students estimates that the average post-secondary student is carrying $28,000 in loan debt.
As a result, retirement savings are taking a backseat.
A recent CIBC survey found that, on average, young Canadians say they don’t start saving for retirement until after their 31st birthday.
That might seem like a late start for retirement savings, but the timeframe makes financial sense, said Adrian Mastracci, a financial planner with KCM Wealth Management Inc. in Vancouver.
“You’ve got between 30 and 65 to accumulate for your retirement – that’s a long time,” he said.
“I think it’s best for Canadians to learn to live within their means and pay off their student debt, if they’ve got some. Fancy moves at this stage in the game are not required.”
However, if you have some spare cash to invest in an RRSP, it’s still a prudent move, he added.
Many younger Canadians seem to be following an investment track where they toss whatever they can spare into an RRSP. A recent Royal Bank poll found about half of Canadians younger than 35 say they own RRSPs , which is the highest amount since 2008.
Of that group, the average planned annual contribution is $4,329, the bank found.
Rules for RRSP contributions are flexible and allow Canadians to carry their contribution limits forward to future years, which means if you can’t muster up enough cash this year, then you can make up for it later.
Investors can also postpone the tax deduction on their RRSP contributions to maximize the return in later years.
“I don’t like to see an RRSP deduction wasted at a lower marginal tax rate,” Mastracci said.
“If somebody’s got only $20,000 of income to report, it’s not a high taxable bracket. Wait until your taxable bracket gets to the $40,000 to $60,000 range.”
A careful RRSP investment strategy is key when you’re working in a lower paying job, said Jamie Golombek, managing director of tax and estate planning at CIBC Wealth Advisory Services.
“If somebody is in the lowest tax bracket – under $40,000 a year – RRSPs may not be the best solution,” he said.
“With someone who’s in a lower bracket to start with, and hopefully will be in a higher bracket later on in life, the RRSPs actually work against you.”
In that situation, Golombek suggested putting the money into a Tax-Free Savings Account, which keeps the money from being locked up for a long period of time.
Planning a budget is critical to coming up with financial plan that works with your income and current job status. Bring a financial planner into the conversation is advised to help get ideas on what strategy is best, and how paying down a mortgage or other debts compares to particular investments.
“If you can live within your means and actually have some left over at the end of the month, then that is a way to invest money in the long term,” Golombek said.
Sketching out a financial plan is exactly where Modi started, and his strategy includes an RRSP that he maximizes whenever his pay exceeds certain tax brackets.
“I have to budget everything and know what my expenses are,” he said.
“Once I have that figured then I can go about planning anything.”