The majority of Canadians wait until the last minute to make their annual contribution to their Registered Retirement Savings Plan, and are therefore not maximizing their retirement savings, according to a survey by TD Waterhouse Group, Inc.
The TD RSP Deadline Poll, which surveyed more than 650 Canadians, showed that 58% of Canadians have waited until the last two weeks before the deadline to contribute to their RRSP. Of the respondents, 15% said they contribute this way every year.
“One of the most important steps Canadians can take toward securing their financial future is making an RSP contribution,” said Cynthia Caskey, vice president, portfolio manager and sales manager at TD Waterhouse Private Investment Advice.
She offered four reasons that Canadians may be waiting until the last minute to contribute, or aren’t contributing at all, and suggested strategies advisors can use to motivate clients to be more proactive with RRSP contributions.
1) They feel they don’t have enough to contribute throughout the year.
Of the Canadians polled, 44% said they didn’t feel they had enough money to contribute to their RRSP all year.
To get clients in the habit of contributing regularly, encourage them to think about RRSP contributions like exercising, Caskey suggests.
“Maybe you’re not ready to participate in an hour-long, high-intensity class, but if you walk for 20 minutes you’re still making a positive difference,” she says. “The same goes for investing in your RSP – even just a few dollars a week is still worth contributing.”
2) They postpone setting up automatic contributions to their RRSP or decide not to contribute because of market volatility.
Many Canadians continue to be wary of market volatility: 15% said they didn’t want to contribute this year because of the market downturn.
In addition, many haven’t gotten around to setting up automatic contribution plans, which would keep them on track with their savings plans regardless of market conditions. The survey showed that 16% of Canadians “meant to” set up an automatic contribution to their RRSP, but didn’t.
Enrolling clients in this kind of plan gets them in the habit of contributing without necessarily taking a toll on their lifestyle.
According to TD Waterhouse, a client who invests $100 per month for 40 years could accumulate more than twice as much as someone who starts investing later and then tries to catch up by contributing twice as much – $200 per month – for 20 years.
While the total amount invested is the same, at $48,000, the total RRSP balance after 40 years of $100/month contribution, based on a constant 6% annual rate of return, compounded monthly equals $199,149; and the total RRSP balance after 20 years of $200/month contribution equals $92,408.
3) They think it’s a better strategy to wait until the last minute to contribute.
About one in five Canadians believe it’s better to wait until the deadline to contribute, and 47% of Canadians say they contribute to their RRSPs only in lump-sum payments.
But clients who do this are missing out on the power of compounding, notes Caskey. “Contributing to your RSP throughout the year, instead of just before the deadline, can really make a big difference.”
4) They may not be aware they can borrow to make an RRSP contribution.
Only 11% of Canadians say they took out a loan in order to contribute before the deadline. Talk to clients about whether this might be a good strategy for them.
“For some Canadians, borrowing to invest in an RSP may be a good idea because they can use the resulting tax refund to pay back the loan, and often you can defer both the principal and interest payment until you receive your tax refund,” said Caskey.