With the RRSP contribution deadline fast approaching on Feb. 29, a new survey from BMO has discouraging news about how Canadians use the retirement savings plan.
More than one in five have raided their RRSP to make ends meet, a strategy that a BMO wealth strategist describes as “not advisable.”
The survey found 21 per cent of Canadians have taken money out of their RRSP to cover living expenses or pay off debt, while 15 per cent took money out to cover costs after an emergency.
Only one-third have paid the money back into their RRSP, and one-quarter say they will likely never pay it back.
“Although it’s not advisable to make withdrawals from an RRSP, it’s clear that some Canadians have had to do so in order to meet short-term needs,” said Chris Buttigieg, a financial planning strategist at BMO Wealth Management.
There can be a significant tax bite to taking money out of an RRSP. There is a withholding tax of 10 per cent to 30 per cent, depending on the amount withdrawn, and on top of that, the money taken out has to be declared as income, to be taxed again.
That’s not the case when making withdrawals to buy a first home under the Home Buyers Plan, or when covering education costs under the Life Long Learning Plan.
The BMO survey found Canadians most often take money out of their RRSPs to pay for homes, with 25 per cent having done so.
The average amount withdrawn is $15,908.
“Making an RRSP withdrawal to free up funds should only be considered as a last resort,” Buttigieg said. Instead, he suggests opening a rainy-day savings account, like a TFSA, to help cover costs when things get tight.
A separate survey from H&R Block found only 18 per cent of Canadians plan to contribute to an RRSP ahead of the Feb. 29 deadline. The survey found only about half of Canadians understand the difference between RRSPs and TFSAs — including the fact that RRSP contributions are tax deductible, while TFSA contributions are not.
The experts CBC News spoke to were unanimous on the need for a plan that takes volatility into account. "I meet so many people who don't have an investment plan - who won't have an intentional allocation to bonds, stocks, cash," says Edmonton-based financial educator Jim Yih. Having a plan is one of the best ways to increase your probability of investment success in the long run, he says. "It's hard not to pay attention to the swings," Yih acknowledges. But having an overall investment strategy and target asset mix makes it easier to avoid being caught up in the emotions of a plunging market. Sticking to that plan, of course, is a critical part of coping during the big slides.
Yih also says investors would be well advised to figure out their risk capacity - how much risk they need to take to reach their goals. This is not the same as the usual risk tolerance measures financial companies use, which he says "test how much risk you want to take." In addition to a financial plan, some advisers we talked to mentioned the importance of having an investment policy statement (IPS). This document determines how investment decisions are made. "The IPS gives you your rules for managing your investments, and when you believe in your rules, you will be better able to manage your response to wild market swings," says Warren MacKenzie, CEO of Weigh House Investor Services. But he notes that an IPS still isn't offered by many financial advisers, so you may have to hunt around. David Chilton, author of The Wealthy Barber Returns, points out that people often think they can handle a lot of volatility - in other words, a lot of risk. That is, until the market actually undergoes a severe correction. "Figuring out how much volatility you can stomach ahead of actually experiencing that volatility is an inexact process," he writes. "For most of us, it's less than we think."
Is the investing concept of "buy and hold" through thick and thin really dead? Some advisers think it's time to at least revisit this familiar maxim. "Buy and hold is a great strategy if you are in a bull market," Warren MacKenzie says. "But if we're in a secular bear market - and I believe we are - buy and hold is the worst strategy." Now is the time to hire a professional manager who can buy and sell to take advantage of that volatility, MacKenzie says. "You must realize that to be a successful investor, you have to buy when the news is bad and when other investors are selling," he adds. Look at volatility as an opportunity to make money, MacKenzie says, because most people sell when the market drops and buy when it's near the top. Hiring someone to carry out your buying and selling also allows that third party to be the sober second thought your first impulse to panic needs - someone who isn't as emotionally involved with your money as you are.
Some advisers aren't quite willing to entirely write off the buy and hold philosophy, but do agree that market dips can uncover good quality stocks that have gone on sale. "Volatility can represent a buying opportunity if the fundamentals are sound and the price has dropped," says Cherith Cayford, a principal with Victoria-based CMG Financial Education. Cayford isn't ready to declare buy and hold dead just yet. "It still makes sense for quality blue chip investments." But she adds that it's vital to have cash available for those market opportunities that dips can produce. The buying doesn't have to be an all-or-nothing process, either. Instead of biting off more than you may be able to chew, you can nibble - investing a portion of your cash when the investment drops to an attractive level.
There are plenty of other investments that historically don't tend to move as dramatically as the stock market as a whole. So don't be surprised if your adviser suggests an increased allocation to alternative products or asset classes to reduce the riskiness of your portfolio. Government bonds, for instance, tend to be much less volatile than equities. But be aware that even long-term government bonds aren't yielding much these days. Utilities, telecoms and real estate investment trusts (REITs) are all less volatile than the dominant TSX sectors of energy companies and financials, while still paying reasonably high dividends. Preferred shares also fall into this category.
For some investors who can't escape the daily litany of depressing economic stories, some advisers suggest that turning a blind eye to the latest swings may be the best coping strategy. "Headlines can certainly be disconcerting," admits Marc Lamontagne. "You have to focus on your long-term goals." "In some cases, I have recommended clients stop opening their quarterly statements." This is, he points out, not a good long-term strategy for people who don't have a professional managing their investments. These days, the do-it-yourselfers need to pay even more attention.