A true alphabet soup. I sometimes wonder whether our governments have gone too far in their zeal to create vehicles that encourage saving among Canadians. Take the example of a 30-year-old individual with an income of $75,000 and two children. I arrive at a potential total of $33,500 in contributions across the various savings plans:
$13,500 in the RRSP;
$7,000 in the TFSA;
$8,000 in the FHSA;
$5,000 ($2,500 per child) in the RESP.
It seems unrealistic to believe that a person could contribute the equivalent of nearly 45% of their gross annual income.
That said, I strongly recommend that everyone maximize the amounts contributed to the various savings plans. It is the best way to ensure a comfortable retirement. I would add that it is preferable to rely on one’s own saving and investing efforts for retirement rather than on those of our governments.
An excellent way to save is to take advantage of automatic contribution programs.
Which contributions should be prioritized?
Each situation is different and must be analyzed based on the needs and specific circumstances of each individual.
That said, the RESP, thanks to government grants, is probably the financial tool offering the best return on capital and the greatest satisfaction. This plan combines a meaningful government contribution with the invaluable value of the education we pass on to our children. In my view, this plan is essential for those who have children (or grandchildren).
The FHSA should be prioritized by those who eventually plan to buy a home. The TFSA is just as attractive and provides great flexibility (no penalties if funds are withdrawn from the plan).
Finally, the RRSP should, in my opinion, be used only when one has a high income and is therefore subject to a high tax rate. The difference between the tax rate during one’s working years and the rate at the time of withdrawals should also be considered: in theory, one contributes while paying a lot of tax and withdraws when paying less.
Ultimately, I do not believe one should stress if they are not able to maximize contributions in every available program.
At the same time, it is important to remember that everything one manages to set aside early in their career will go a very long way toward retirement.
Let us return to my example of the 30-year-old individual. Suppose they set aside, say, $15,000 per year starting at age 30 and for the next 35 years. This amount would then be placed in a non-taxable account such as a TFSA and invested in the stock market. Assume an annual compounded return of 8% over that period. At retirement, this person would have nearly $2.8 million; not bad, right?
Now suppose that the same person started investing at age 20 instead of 30, investing in the same way, but “only” $7,500 per year for 35 years (until age 55, after which they stop contributing). This person therefore invested a total of $262,500, or half of what the other person invested over 35 years. How much will this person have at age 65? More than $3.0 million.
The power of compound interest is immense and should encourage everyone to start saving and investing as early as possible. At the beginning of this year, I recommend that you make the most of the various savings programs available to Canadian investors.
Philippe Le Blanc, CFA, MBA
Chief Investment Officer at COTE 100
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