Boomers drag down average RRSP contributions

Demographics and rising house prices have pounded Canada’s RRSP contribution rates back to levels last seen in 1970, according to the RBC Economics 2012 RRSP Report.

The downward trajectory of RRSP contributions as a share of personal disposable income (PDI) was first noticed in 2010. The survey identified aging boomers past their highest saving years and a growing preference for real estate assets, which have been outperforming equities, as the key factors that are influencing the trend.

“As house prices have increased, Canadians have been reducing their RRSP contributions, which suggests that real estate investments are acting as an alternative to RRSP investments,” said Paul Ferley, assistant chief economist, RBC. “Still, our research continues to demonstrate that Canada’s aging population is the dominant force behind the decline in RRSP contributions.”

RRSPs were first introduced 55 years ago to permit individuals to shelter financial assets from income taxes. Contributions grew steadily from 1968 to 1997, relative to PDI, but have been falling ever since.

The study projects that the decline in RRSP contributions will continue to trend lower through 2020. This rate is expected to fall back to under 2% of PDI—a level not seen since the 1970s—from a high of 5% of PDI in 1997 and 3.3% in 2010.

“Our research indicates that the downward trend from 1997 to 2010 coincided with the aging boomer generation—as boomers moved past their higher saving years in their mid-30s through to their mid-50s,” Ferley explains. “By comparison, Canadians under the age of 34 tend to be the least likely to make RRSP contributions.”

Ferley said the best way to counter the trend is to generate greater awareness among Canadians. “It’s important household are aware of the tax savings benefit of RRSPs and make an educated decision in terms of how they should save for their retirement years,” he said. “If they are under-contributing to the RRSP, there’s a strategy that’s being followed that suggests they can get higher returns elsewhere.”

Perhaps a little late, but many boomers wish they could go back in time and make RRSPs an important part of their retirement planning. In a BMO Registered Retirement Savings Plan (RRSP) study boomers rated not making RRSP contributions as one of their biggest regrets about their retirement planning.

The survey, which examined the reflections and regrets of Canadian boomers (aged 45 or older) on retirement planning, found a quarter of those polled wished they had made regular contributions to maximize their RRSP. Another 42% said they wish they had started saving for retirement at an earlier age.

“Canada’s boomers believe that getting an earlier start on retirement planning would have helped set themselves up better for a successful retirement,” says Tina Di Vito, head of the BMO Retirement Institute.

“Saving from an early age can help establish good habits that will become part of your financial routine, ultimately leading to a stronger financial position when you enter retirement. Starting to put money away in an RRSP or TFSA is just the first step in building a solid financial plan: not only for retirement, but for all your key life-events.”

However, with respect to retirement savings, 35% of boomers polled still believe they should have invested more in real estate.

“Buying a home can be one of the most important financial decisions one can make and the investment can result in a significant retirement nest egg later in life,” said Laura Parsons, mortgage expert, BMO Bank of Montreal. “However, it’s essential that Canadians avoid carrying mortgage debt into their retirement years. One way to do this is by choosing a shorter amortization—preferably a maximum of 25 years—which can save thousands of dollars in interest costs that can be contributed directly towards retirement savings.”

When asked what retirement planning advice they would give to those in their early 20s, 50% boomers said open an RRSP as soon as possible and contribute to it on a regular basis, while 53% favoured opening a Tax Free Savings Account (TFSA) and maximizing the amount invested in it annually.