Pension & RRSP stats

[brucecohen]

StatCan released lots of them today: Release

[ghariton]

Thanks, Bruce.

Half of Canadians are contributing neither to an RPP nor to an RRSP, eh?

We better have lots of immigration.

Georges

[BemusedLurker]

Work till you drop is their motto -

BL (or maybe this ALPO sure tastes good)

ps - truly in poor taste

[saylavbda]

From a quick glance, it makes sense. Younger people with lower incomes don't contribute to RSP, older people with higher incomes do.

Why would someone who is 30, making 25K contribute, given all the demands on one's take home pay, when they can save up the RSP room for later when they are in a higher tax bracket and with more free cashflow to contribute.

Of course, the financial industry will jump on the 'only 50% of taxpayers contribute to their pensions or RSP' to sound the alarms of doom and gloom as done in the paper the other day to try to sell more RSPs.

[twa2w]

Lots of older people don't contribute either.
I didn't read the stats linked above very closely but I didn't see any age breakdowns - I suspect close to 40% of 50 year olds don't contribute to their RSP every year.
TD published a study about 10 years ago that said the average 60 year old had X $ saved excluding their home. The X was a very low figure IIRC it was less than 25000. If I can find it I'll link it later.
Cheers
J

[saylavbda]

Between 1992 and 2004, the biggest increase in the number of contributors to RRSPs occurred in older age groups. Contributions by taxfilers aged 45 to 54 and 55 to 64 were up by about 50%. At the same time, the number contributing in the youngest age group (25 to 34) rose just 3%.

And

In 2004, just 3% of taxfilers aged 25 to 64 with incomes less than $10,000 and eligible to contribute made normal contributions.
This compares with 76% of taxfilers with incomes of $80,000 and over. This group also made the highest average contribution in 2004 or $9,512 per person.

Both from the article.

If you're a low income person, you probably don't contribute much.
If you're a high income person, you do.
If you're young you probably don't contribute due to cashflow.
If you're older, you have the cash to contribute.
This makes perfect sense to me.
If I'm 50 and making say 35K or less, why contribute much. I wouldn't be surprised if this represents a quite a few people given the average income in Canada.

For these stats to have meaning, more details are needed.

As a general rule, at what income level do people feel is the minimum to make RSP? By this I mean if a person is making 30K, is it worth starting an RSP given the limited amount of take home pay.

[cardhu]

I suspect close to 40% of 50 year olds don't contribute to their RSP every year.

Its higher than that, actually. Close to 50% of 50-54 year olds with taxable returns don't claim RRSP deductions in any given year.

[ghariton]

Close to 50% of 50-54 year olds with taxable returns don't claim RRSP deductions in any given year.

I wonder how to interpret that.

Some of the people in that age group are retired already. Others may be tapering off, and already have low tax rates, so the RRSP is not worth while. In any case, A RRSP is more attractive, the longer you can leave your money in, and at 54, that is 15 years. In practice, you will likely need some money sooner.

Georges

[AltaRed]

There is little incentive to contribute to an RSP if you are struggling to get by day-by-day on a middle class income, paying off a mortgage and if you think you will not likely be in a much lower tax rate when you retire.

I know it has been debated ad nauseum in prior threads and forums, but paying off the mortgage has a whole more 'sleep at night' value than contributing to an RSP. That is the way I did it and I would counsel anyone who asks to do the same.

[brucecohen]

Public sector agencies employ about 30% of the Canadian workforce. Most of those people have good defined benefit pension plans and get high PAs. So there may be little point in them contributing to RRSPs.

There's little, if any, point in the working poor having RRSPs since they need money today and govt benefits often replace most or even all their pre-retirement income once they stop work.

[Brix]

paying off the mortgage has a whole more 'sleep at night' value than contributing to an RSP

For young families (and some rather more-established ones) in some Canadian cities paying the mortgage consumes an alarmingly large portion of income, thanks to the meteoric rise of housing prices. Among the factors driving the housing bubble has been the belief (or illusion) that, in addition to paying for shelter, mortgage payments are a form of long-term investment in the currently hottest (and tax-exempt) asset class -- the principal residence.

See the old thread ('REAL ESTATE IS THE NEW RRSP') initiated with a proposal that this belief is entirely justified.

[steves]

And let us not forget the 'inter generational transfer of wealth' effect. A goodly amount of expected or already realized inherted wealth is in play also. This won't be found in the RSP stats, it will be in nonreg and real estate, mostly.

[Bylo Selhi]

The case for starting an RRSP early. Procrastination will cost you retirement dollars

This week, I'm inspired to write about something as basic as starting your retirement savings sooner rather than later. You see, I was reminded once again that each generation has to be educated on the fundamental truth that time is your biggest ally when it comes to financial security. Make sure your kids understand this... Although Bertrand contributed $90,000 more to his retirement savings than Ernest, and both earned the same rate of return, Bertrand ended up with $19,360 less in his portfolio than Ernest. The difference? Time. Ernest's money was working for him seven years sooner.

A quibble.

Ernest, in our story above, will have saved approximately $23,000 in income taxes (at a 46-per-cent marginal tax rate) if his $50,000 in contributions were made to an RRSP. These tax savings, if invested outside the RRSP at 5 per cent, after tax, annually, could amount to an additional $98,860 at age 65 for Ernest.

Unless Ernest has done very well in his career, it's unlikely that he'll be in the 46% marginal tax rate by age 30. Nevertheless, using tax refunds to start an emergency fund is a good idea. (And using them to pay off credit cards, make accelerated mortgage payments, etc. is an even better idea.)

[patriot1]

There is little incentive to contribute to an RSP if you are struggling to get by day-by-day on a middle class income, paying off a mortgage and if you think you will not likely be in a much lower tax rate when you retire.

Little incentive? How about not living at the poverty level when you retire?

The tax rate argument is bogus. RRSP's produce significant tax benefits even if the marginal rate at withdrawl is the same as at contribution - although I know a lot of people don't understand this.

I will note that pre-paying your mortgage is just as tax-advantaged as an RRSP contribution, and provides a larger riskless return. But I have a feeling that those not making RRSP contributions are not doing this either.

I think a lot of people not contributing to an RRSP are rationalizing it by thinking that they can use the value of their house to retire on. They're in for a shock.

Also if you're unable to find enough discipline to contribute to an RRSP when you're young, you're unlikely to contribute until the kids are grown and the house paid for, which is far too late to start.

[saylavbda]

The case for starting an RRSP early.

It's hardly a case, its a marketing piece that's been around for along time that ignores several important points, namely the time value of money invested. Marginal tax rates, in a real live case, its more likely that Bertrand would be in a higher marginal tax rate later in life than Ernest was at the top rate at 30. The fact that Bertrand might not have had the free cash at 30 for RSP contributions as he was paying down his mortgage. But why bother dealing with real life issues when considering the merits of early RSP contributions, it will only get in the way of the sales pitch.

[AltaRed]

There is little incentive to contribute to an RSP if you are struggling to get by day-by-day on a middle class income, paying off a mortgage and if you think you will not likely be in a much lower tax rate when you retire.

Little incentive? How about not living at the poverty level when you retire?

The tax rate argument is bogus. RRSP's produce significant tax benefits even if the marginal rate at withdrawl is the same as at contribution - although I know a lot of people don't understand this.

I don't disagree, but tell that to a family that is struggling to get by through no fault of their own (and by that I mean with conscious effort - not free spenders). Providing for family and getting kids a good start in life is usually the first priority.

But I do disagree with you if the marginal tax rate at time of contribution is a lot less than at retirement. It made no sense to me to contribute when I was young and poor and in the bottom 1-2 tax rates (and use it or lose it was in place then), and then to withdraw once I was retired in a high marginal tax rate. Granted that is a judgment call for those of us who have confidence that we will be successful financially.

I will note that pre-paying your mortgage is just as tax-advantaged as an RRSP contribution, and provides a larger riskless return. But I have a feeling that those not making RRSP contributions are not doing this either.

But that is the quid pro quo, isn't it? I don't think anyone is saying to do neither. But a conscious effort to pay off the mortgage versus contributing to an RSP is still an effective choice and one that I took with no regrets whatsoever.

Also if you're unable to find enough discipline to contribute to an RRSP when you're young, you're unlikely to contribute until the kids are grown and the house paid for, which is far too late to start.

Maybe, but I believe those that pre-pay down their mortgage as quickly as is practical do have the discipline to then re-allocate those funds to an RSP and other investments. It worked very well for me.