Income a big factor for RRSP contributions

Everyone knows that Canadians aren’t dropping enough cash into their RRSPs, and now Statistics Canada has proven it, revealing that while six in 10 Canucks contribute, the median value of RRSP plans is still just $25,000.

“The situation is still that not enough people are saving for retirement,” says Gena Katz, tax executive director at Ernst & Young.

She says $25,000 is really low, but that number takes into account every Canadian young and old.

The StatsCan report also says that younger people, ages 25 to 44 averaged only $15,000 in their plans, while people between 45 and 54 averaged $40,000 and those 55 to 64 averaged $55,000.

“This isn’t surprising,” says Katz. “When people are buying houses, starting families, buying cars, their income tends to be lower. Needless to say, retirement savings is not at the front of the line. As time goes on, they have more funds available and are more concerned about retirement.”

What’s most telling from Statistics Canada’s findings is that 90% of families with an after-tax income of $85,000 or more held RRSPs, while only 35% of families with incomes less than $36,500 contributed to a savings plan.

Patricia Lovett-Reid, senior vice-president at TD Waterhouse Canada, says this statistic is worrisome because it means the wealth gap between the rich and the poor is widening.

“We’re seeing a net-worth gap between high and low income,” she says. “What that summarizes is that higher-income families will be better prepared for retirement.”

The report also revealed that lower-income families don’t have employment pension plans to rely on. The median income of families who had both EPPs and RRSPs was $65,800.

As well, the findings show that 35% of lower-income families held all their RRSP investments in assets with predictable values, such as GICs. A much larger majority of families with $85,000 or more held their contributions in variable-value assets, such as mutual funds or stocks. This was especially troubling, though not surprising, to Lovett-Reid.

“Families without an EPP were more likely to invest in predictable values compared to those with employee savings plans,” she says. “My fear is you don’t have the opportunity to have that money grow, and you’re not getting the upside potential elsewhere.”

Lovett-Reid says the overriding theme of this report is that lower education equals lower investment risk strategy, which ultimately means less smart saving.

She adds that lower-income earners have higher debt levels, and that likely translates into less RRSP contributions.

“I worry sometimes,” she says. “I think what we have to look at is…if we get too fixated on only addressing debt level, you really do lose out on time and compounding.”

While the Statistics Canada study is from 2005, both Lovett-Reid and Katz say things aren’t much different today. The median values might be higher, but people still aren’t saving for retirement.

“It’s higher now because the population has aged, and as people get older, they tend to look at RRSPs more,” says Katz.

“I’m not sure things would be a lot different today,” adds Lovett-Reid. “I wish I looked at something and said, ‘There’s the aha moment.’ But that’s not happening. It’s more a call to action so we don’t see this gap widen.”