We have done a truly abysmal job of educating Canadians about personal finance. No surprise then that there are a lot of myths and misconceptions out there about retirement savings and RRSPs in particular. Let’s address a few of them right now.
Myth: The government will cover the basics
Truth: I guess it depends on what you consider the basics. What you can expect from the Canada Pension Plan and Old Age Security amounts to only about $1,000 per person per month on average. Think about your cash burn today — how far would $1,000 take you? And you will likely have additional health care expenses as you age, and the cost of home care, physiotherapy, elective medical procedures and some prescription drugs may come out of your own pocket. You might live a longer and more active life, but your enjoyment of that life may be curtailed because of your inability to pay for it.
Myth: I can’t afford to save for retirement right now
Truth: The cost of living today is very high, especially when you factor in housing costs. I hear the “I can’t afford it” complaint all the time and from people at all income levels. But it isn’t about affordability. It’s about trade-offs. We are constantly trading off time, energy, convenience, pleasure and money. It is just that we are unaware that we are making these trade-offs. If you can’t afford to save for retirement now, I can tell you it isn’t going to be much easier in 10 or 15 years. By not saving now, you’re stealing money from your future self. Picture someone in your life who is, say, 80 years old. How different would his life be right now if his retirement income was cut in half?
Myth: I’ll just work longer
Truth: There are many occupations where you could work full- or part-time beyond the typical age of retirement, especially if your skills are in high demand or if you work for yourself. But in many other fields, it may not be possible to work into your 80s, either because you won’t have the physical or mental strength to do the job or because the industry is reticent to employ older workers. You can bemoan the prejudice inherent in this second point, but I’m not banking on ageism’s disappearance in my lifetime. My main issue with a plan to simply work longer — over and above the reality that it might not be possible — is that it takes away your freedom to stop working when you want to.
Myth: My family will provide for me
Truth: You may come from a family in which an inheritance is likely. But can you bank on it? If you think that an inheritance is in your future, sure, it is relevant to your retirement savings. But you’ll want to get more details on what that inheritance is likely to look like. While it is a delicate conversation, it is one worth having with those from whom you might inherit. The ballpark amount could be more than you expect, but it could also be less, and if so, it is much better to know that now instead of in 20 years, when you’ll have less time to save.
Myth: My house is my retirement plan
Truth: Your house probably represents a big portion of both your monthly expenses and total net worth, but it doesn’t make for much of a retirement plan. That’s because in order to use your house for that purpose you will need to sell it. Why? Because you can’t eat your house. You will need to unlock some of the equity you have built up over the years to put groceries in your fridge. That might seem like a good idea in theory now, but it can be a tough one emotionally to follow through on. For example, downsizing in square footage doesn’t always mean downsizing in price — a downtown condo can cost as much as a house in the suburbs.
Myth: RRSPs are a scam
Truth: An RRSP is just a special kind of account that shelters some of your income from the tax collectors. The quality of the investments you buy to put into that account can vary widely, but to say that RRSPs themselves are a scam simply isn’t accurate. You are confusing a type of account with investments that could go into that account. RRSPs themselves are not a scam. In fact, I’d argue that RRSPs are one of the few perks that the average taxpayer has left. Sure, you need to pay attention to where you put your money to ensure that you aren’t being taken for a ride, but don’t do yourself the disservice of letting fear push you off course.
Excerpted and adapted from The Moolala Guide to Rockin’ Your RRSP, published by Figure 1.
Bruce Sellery is a personal-finance expert and author of the bestselling book The Moolala Guide to Rockin’ Your RRSP. He’s a columnist for MoneySense magazine and a regular guest on Cityline and the Lang & O’Leary Exchange. His website is moolala.ca.