I'm a Pisces, so I love RRSP season. It's always a double bonus for me: I know my birthday is coming up soon (always a fun day), and I know I will be contributing significantly to our wealth when making my family's RRSP contributions.
I find it interesting, though, that so few Canadians actually maximize their RRSP contribution room. Just under six million people in Canada belong to an employer-sponsored retirement plan, so for the vast majority the RRSP is THE retirement savings plan. Yet, close to 90% of Canadians have unused RRSP contribution room, which means they are underfunding their retirement income plans. And the amounts are large: we have missed contributing over $200 billion collectively1 since 1991, when the concept of RRSP contribution room was created.
Underfunding your RRSP is something you can afford to ignore if you think that living on $1400 a month from Old Age Security (currently about $500 a month) and Canada Pension Plan (just over $900 a month) will be enough. That's unlikely, though.
In a news release issued December 18, 2009, Statistics Canada2 reported that, on average, Canadian households spent $71,360 in 2008, which was an increase of 2.0% over the year before. Here's what's significant: personal taxes accounted for 20.5% of the average household's budget. This is by far the single biggest expense item for Canadian families. (The costs of shelter represented 19.9%, transportation 13.6% and food 10.4%.)
Even if you are frugal to a fault, your obligation as a taxpayer will continue to eat into your savings, and therefore your ability to spend later in life. No question, taxes will be your biggest lifetime expense, particularly if you think the solution to tackling recent deficits created to stimulate the global financial crisis will include higher taxes.
The RRSP, however, comes to the rescue of an uncertain future. It's a great hedge against an underfunded retirement and can solve immediate cash flow problems, too. Consider this checklist of benefits before March 1, 2010, the deadline for contributing to your RRSP for use on the 2009 tax return:
RRSP Benefits for you:
Convinced? Here are the three things you need to do to take advantage of your RRSP investment opportunity:
Then just do it-but before March 2. I already have, and I plan to spend my birthday dreaming of my enhanced retirement options, as a result of my anticipated good fortune!
1 Statistics Canada, 1998, Frenken, Tapping Unused RRSP Room
2 Statistics Canada, 2008, Survey of Household Spending
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