Fixed retirement plans hurt clients

How Canadians save for retirement may be as, if not more, important than how much they save, this according to a new report by the Certified General Accountants Association of Canada.

“Saving regularly for your retirement is commendable,” says Rock Lefebvre, CGA-Canada’s vice-president of research and standards. “But without considering the best blend of alternatives, you could be overlooking some important strategies for building retirement capital.”

Consider that single individuals and couples with no dependents may be better off accelerating their mortgage payments than contributing to a retirement account. This is the case for all income levels and savings rates, but particularly for lower-income individuals. Those earning $30,000 annually and saving two per cent of their earnings will get a nearly twice higher return on savings by accelerating their mortgage payments compared with saving through a registered retirement savings plan (RRSP).

RRSPs, however, do provide homeowners with the second best saving outcome while being the number one choice for renters.

Saving for retirement through a tax-free savings account (TFSA) along with either an RRSP or assets generating capital gains outside of registered plans turns out to be a relatively weaker retirement strategy according to the report. The performance of a TFSA plus RRSP option improves significantly for medium and higher-income individuals who save 10 per cent or more of their earnings. In those cases, the TFSA and RRSP combination becomes a strong competitor to the pure RRSP option.

Details and comparison tables are available in Planning for Retirement: There is No Substitute, which Mr. Lefebvre co-authored. Based on four savings scenarios, the report compares the estimated saving outcomes of single individuals, couples with no dependents, and couples with two children.

“There are a variety of ways to ‘save’ for retirement and not all are equally valuable in all instances,” says Mr. Lefebvre. “Determining the most efficient route requires a critical and thorough assessment of your own personal circumstances and retirement goals.”

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.