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10 Retirement Savings Tips

Make the most of your Registered Retirement Savings Plan (RRSP): it’s simpler than you might think!

Here are some tips to consider at any time of the year, but especially before the annual RRSP contribution deadline. The deadline to contribute to an RRSP for the 2019 tax year is March 2, 2020.

The tax year and annual deadline are important because RRSP contributions may reduce your taxable income, giving you an incentive now to put money away for the future. 

1. Start early and invest regularly

The earlier you start, the more you may have in the future.

It’s easy to set up automatic contributions to your long-term savings or investment accounts. Once set up, you can take comfort knowing you’re actively saving for the future.

Three investors, aged 25, 35 and 45, contributing $100 every two weeks until the reach 65

Imagine three investors, aged 25, 35 and 45, contributing $100 every two weeks until the reach 65. They all earn an annual average return of 5%. The 25 year old ends up over $150,000 wealthier than the 35 year old and almost $250,000 wealthier than the 45 year old.*

No matter when you start, let us show you how a regular investment plan can help you reach your retirement goal.

2. Harness the power of compounding

By making RRSP contributions on a regular basis (for example, every pay day), you could grow your nest egg faster, taking advantage of market returns throughout the year.

Look at the difference between investing regularly through the year instead of contributing the equivalent lump sums at the RRSP deadline; over 40 years it could add up to $18,052!*

Difference between investing regularly through the year instead of contributing the equivalent lump sums at the RRSP deadline

3. It pays to have a plan –  keep it fresh

Many people underestimate how much they will need to save to meet their income requirement going into retirement. Having a plan in place and regularly reviewing it against your goals can help avoid unpleasant surprises and last minute scrambles.

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4. Consider your options

An RRSP is the typical go-to option for many Canadians saving for retirement. Depending on your circumstances, a Tax-Free Savings Account (TFSA) may be an additional option for you to consider.

A TFSA is flexible in the event you need access to emergency funds, and may be more advantageous depending on your tax bracket during your active savings years and going into retirement. For those who have never contributed to a TFSA, the accumulated contribution room may be up to $69,500 in 2020 – and that is expected to continue to grow each year.

 

5. Consolidate your registered accounts with one financial institution

Generally, Canadian tax rules allow you to transfer certain registered accounts between financial institutions without triggering a taxable event or affecting your contribution limits.

This includes TFSAs, RRSPs, registered pension plan amounts if you are changing employers (may be subject to transfer limits), and some or all of a lump sum "retiring allowance" received as part of a severance or retirement package.

Having all your retirement savings in one place makes it easier to keep track of progress against your goal, can potentially reduce fees and help ensure proper diversification by avoiding overlap in your portfolio.

 

6. Borrow to maximize your contributions

You can make a contribution over and above your annual limit if you have unused contribution room from previous years. You might even consider an RRSP loan1 to catch up on that unused contribution room if appropriate for your specific circumstances.

Your contribution limit for the 2019 tax year is 18% of your 2018 earned income less any 2018 pension adjustments, up to a maximum of $26,000. The contribution limit is indexed for inflation and will increase to $27,230 for the 2020 tax year.

To find out what your personal RRSP and TFSA contribution limits are, check your annual Canada Revenue Agency (CRA) Notice of Assessment or call CRA at 1-800-959-8281.

 

7. Take advantage of a Spousal RRSP

If you expect your spouse's income to be considerably lower than yours during retirement, it may be wise to direct your contributions into a Spousal RRSP. It’s an easy way to split income for tax purposes.

Usually, the higher income earning spouse contributes to the Spousal RRSP and claims the tax deduction. The funds in the Spousal RRSP accumulate free of tax until they are withdrawn by the other spouse (the lower income earner), potentially resulting in tax savings.

Note that even after you turn 71, you still have the option of contributing to a younger spouse’s RRSP until they turn 71 themselves.

 

8. Consider an asset mix strategy

Research has shown that asset mix is a key driver of a portfolio’s performance.2 Having the right balance between cash, fixed income, and equities to match your personal tolerance for risk, your return expectations, and your time horizon is very important.

HSBC can help you plan for your retirement and find solutions to meet your specific needs.

 

Curious to see how your savings could grow if you invest in a diversified portfolio?

9. Think global

As Canada makes up only about 3.5% of global stock market capitalization3, global investments can play a role in reducing risk and helping to increase return potential for your investment portfolio.

A portfolio made up of several types of investments from different countries may be stronger over the long term – and may be less exposed to extreme market movements – than one that’s invested in a single country, asset class or type of investment.

That’s why a sensible approach for most investors is a globally diversified portfolio that includes Canadian and international stocks, combined with fixed income investments.

 

10. Defer deductions until a later tax year

Many investors automatically claim a deduction for the amount they have contributed without considering if it might be better to claim it in a future year.

Deferring deductions might make sense for those expecting to be taxed at a higher marginal tax rate in the future due to career progression or potential changes to tax brackets. But there is a cost to this approach because the deduction won’t apply right away.

Start your plan for retirement today

 

 

* The rate of return is used to illustrate the effects of compounding growth, assuming there are no fees or taxes, and it is not intended to reflect future returns.
 

Borrowing to invest can be a risky strategy that may not be suitable for all individuals; accordingly, you should carefully consider your own situation, risk tolerance and important information provided before making a decision.
 

Source: “Determinants of Portfolio Performance II: An Update,” reprinted from Financial Analysts Journal, 1991.
 

Source: Morgan Stanley Capital International All Countries World Index, September 30, 2019.

These tips are for informational purposes only, are subject to change without notice, and are not intended to provide specific financial, investment, tax, legal or account advice to you. They should not be relied upon in that regard. You should not act or rely on the information without seeking your own financial, investment, tax, legal or account advice.

Issued by HSBC Bank Canada, January 2020.

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