Cautious clients still contributing to RRSPs

By Bryan Borzykowski | October 29, 2008 | Last updated on October 29, 2008
4 min read

While many clients are worried that their RRSPs will be affected by the market downturn, a new survey shows that most investors aren’t panicked enough to stop contributing to their registered savings account.

A poll commissioned by Edward Jones revealed that 66% of Canadians won’t make any changes to their RRSP this year.

“We thought that was really good,” says Kate Warne, Canadian market strategist at the investment firm. “A lot of people are reading headlines and might think that they’re doing the wrong thing, but clearly they do understand that regardless of the current market conditions, the only way to achieve long-term retirement income goals is to keep putting your money to work.”

The survey doesn’t break down ages of respondents, so it’s unclear whether or not soon-to-be retirees feel the same way about their RRSPs as younger Canadians, who have a longer time horizon.

However, Warne says people in their 60s should continue making contributions. She adds that the closer clients get to retirement the more fixed income or short-term GICs they might want to invest in, but they need to keep adding money to their equity-based RRSPs.

“With the increase in life expectancies, they will need to draw money over the next 30 years,” she says. “So getting those initial years of tax-deferred growth will help with the ability to have money to live on when the client is in her 90s.”

Although most Canadians won’t alter the amount of their RRSP contributions, the survey found that 8% of respondents are planning to add less to their accounts.

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  • Warne thinks that could be a result of people being worried that they’re putting money in at the wrong time, or a case of not having enough cash for a contribution.

    “Some people might not be able to afford it because of the current crisis,” she says. “Others will want to wait until a better time, because the markets are so volatile.”

    Cynthia Kett, a CFP with Toronto-based Stewart & Kett Financial Advisors, says generally her clients are actually thinking about increasing their savings. “They’re being very cautious right now and, if anything, it’s getting them thinking that they need to save more and spend less than before,” she says. “And I would hope that those who aren’t making or increasing their RRSP contributions are paying down debt.”

    Kett adds that if clients are concerned about losing their job during the crisis, now would actually be the best time to contribute to an RRSP.

    “If they put money in an RRSP for 2008, then at least they’re getting a deduction at a higher marginal tax rate than if they’re unemployed and do it next year,” she explains. “If they had to pull money out because they were jobless, they’d be taxed at a lower marginal tax rate than when it went in.”

    While Edward Jones’ survey results are promising for advisors and RRSP advocates, with the new tax-free savings accounts launching on January 1, respondents could change their view next year.

    “I think people are going to use the TFSA as a short-term holding bin,” says Kett. “Or people who maxed out registered plans will want to take advantage of the $5000 limit.”

    Right now, short-term savings sounds pretty good, as many are still worried about the markets. But Warne doesn’t think RRSPs will lose out to TFSAs, because the former savings vehicle protects clients against bad decisions.

    “An RRSP is hard to pull out of. It creates a barrier that helps them do the right thing,” she says. “If people panic, they have to pull the money out and then figure out when to put the money back in. You may make the first decision right, but it’s rare that the second decision is a good one, too.”

    “Once people put money into an RRSP, they think twice about whether they want to take it out again,” adds Kett. “It gives people a little extra pause. If it was sitting in a TFSA and a good deal came up on something, like a vacation package, they’re more likely to do something about it. It’s a way for people to protect themselves against themselves.”

    Whatever people do, the bottom line is that advisors should make sure their clients’ long-term objectives are still being met.

    “Anyone who has planned properly should have some strategy for retirement savings and, whether we’re in good times or bad, they’re going to try and stick to that plan,” says Kett. “Those automatic savings or once-a-year contributions in an RRSP shouldn’t change and hopefully the client is doing what they have always planned to do.”

    Filed by Bryan Borzykowski,,


    Bryan Borzykowski