The results of Toronto-based Bank of Montreal‘s (BMO) annual RRSP survey, which found that 38% of Canadians have withdrawn money from their RRSPs before the age of 71 last year, up from 34% the previous year, demonstrate an urgent need for financial advisors to discuss long-term financial and retirement planning with their clients.
The trend is particularly worrisome because Canadians are taking out more than they did in the past, with the average withdrawal swelling to $17,213 from $15,908 the previous year.
“It’s concerning to see that so many Canadians are dipping into their RRSPs to meet short-term needs, which should only be considered as a last resort” says Chris Buttigieg, director of BMO’s wealth institute.
Advisors should be concerned not just by the high levels of withdrawals, but for the reasons people are using the money; although 30% said they were using drawing down their RRSP to buy a home, 21% were paying off living expenses, 18% were paying off debt and 18% were withdrawing money for emergencies.
The survey found that Canadians are generally aware of the consequences of dipping into RRSP savings as 75% are “very concerned” about the consequences of taking money from their RRSPs.
Furthermore, 73% are “familiar” with the tax penalties or rules for repayment for early withdrawal, but a surprising 19% don’t expect to ever pay it back.
“As advisors, we want to make sure we’re educating our clientele about the purposes of RRSPs, the short-term benefits, obviously, the tax deduction and, over the long term, the tax-deferred growth,” Buttigieg says.
The survey’s worrisome results should serve as a wake-up call to advisors who focus mostly on providing investment advice, says Daniel Roy, a certified financial planner with Praxis Wealth Management Inc. in Ottawa.
There’s ample evidence, including the BMO survey results, that many Canadians are living beyond their means and dipping into their RRSPs to keep the spending going a little longer, he says. For example, Roy notes that a client recently called him to say he withdrew $8,000 from his RRSP to cover expenses that were rung up over the Christmas holidays.
“So, in April 2018, [the client] is going to have to meet the taxman,” he says.
Roy’s solution – and what he recommends for other advisors potentially facing the same situation with clients – is to play more of a role as a holistic advisor, or lifestyle coach, than simply as an investment advisor. This could include working on budgeting to ensure clients are saving and investing enough and not piling up debt to finance a lifestyle they really can’t afford.
Buttigieg recommends that advisors talk to clients about their retirement future and show the potential damage RRSP withdrawals cause. Alternatives, such as home equity loans and the creation of true emergency funds, should also be brought up.
Although the BMO survey doesn’t break down suvey participants by age, Barry LaValley, president of the Retirement Lifestyle Centre in Nanaimo, B.C., says a surprising number of baby boomers approaching retirement are dipping into their RRSPs.
“That’s not a discussion they would have with their advisor because the client would be embarrassed to have it, and the advisor would not ask about it,” he says.
Like Roy, LaValley says advisors have to place a greater priority on financially stressed clients who may or may not be looking at their RRSPs as lifestyle piggy banks.
“Advisors, especially as clients get older, have to reposition the role that they play in the client’s life,” he says. “You can’t just be the investment person anymore. Clients need somebody to protect them from themselves.”
The BMO survey also found the heaviest withdrawals from RRSPs last year were on the country’s coasts.
In Altantic Canada, 48% of survey participants said they made withdrawals averaging $25,485; in British Columbia, 44% of survey participants said they made withdrawals averaging $21,524.
In contrast, Ontario was closer to the national average at $16,593. The BMO report had no explanation for the regional variation.
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