Understanding RRSPs and your retirement plan

Have you started planning for retirement? For some people, retirement is on the horizon, while for others it’s in the distant future. However, no matter how close or far you are from retiring, it’s never too early or too late to perfect your retirement plan. Building the right savings strategy, and setting the right goals, can help ensure you can enjoy retirement to the fullest. A big part of that involves your Registered Retirement Savings Plan (RRSP). Here’s what you should know about this product, how to manage it, and how else you can prepare for your financial future.

What is an RRSP?

An RRSP is an incentivized Canadian savings product that was created to help people prepare for retirement. Introduced back in the 1950s, the government designed this product to encourage Canadians to save more money and think about the future, and give them an easier way to do it. Without an account or product that is specifically tailored to help people set money aside for their retirement, it can be hard to build these kinds of savings. This product has tax advantages and contribution guidelines that are designed with retirement in mind, which we will discuss below. 

What are the tax benefits?

RRSPs have a great tax advantage for Canadians who invest in them. Your contributions to your account are not taxed, which means anything you add to your RRSP can be subtracted from your annual income. If you put $5000 in your RRSP this year, for example, you don’t have to report that $5000 as taxable income. Of course, this means you will pay less tax! The money in your RRSP is only taxed when you withdraw it. The good news here is you likely won’t take money out of your account until you are retired. At that point, your annual income will be much lower. Although your withdrawals will be taxed, you will be in a lower tax bracket. In the long run, your contributions cost much less, and permit larger savings!

How much can you contribute?

Of course, there are guidelines you must meet when you have an RRSP. You may only contribute up to 18 per cent of your annual income each year, or $31,560, which is the designated maximum amount for 2024. The smaller of these two numbers will be the one that applies to you. The dollar amount increases each year, and this year’s number is up from the 2023 maximum of $30,780. This limit exists to prevent Canadians from dodging too much in taxes. 

We know how much you can contribute for your retirement plan, but how much should you contribute? Those who can comfortably afford the maximum amount should do so, as it will give you a nice retirement bundle and help keep your taxes low. In general, though, we recommend contributing around 10 per cent of your income. This ensures your account steadily climbs throughout the years, but your present finances don’t suffer as a result. Of course, everyone’s situation is unique. Your budget will indicate what you can afford to contribute, because you shouldn’t put yourself in financial trouble today so you can save for tomorrow. It’s just as important to maintain your financial health in the present. If you’re unsure how to budget with an RRSP, you can ask your broker for guidance!

Other ways to prepare for retirement

Apart from managing your RRSP, you should also take some steps to plan out your day to day retirement life and budget. With a lower income, you will need to create a budget that reflects your new situation, which is one you haven’t experienced before. Will you need to make any changes to your current spending habits? Consider how much you spend and save right now, and how that might change upon retirement. Now is the time to think about adjusting your budget accordingly. You should also think about your future plans. Do you hope to travel, or perhaps pay for a child’s post-secondary education? These are large expenses you should be actively planning for as they draw nearer. The more prepared you are for the daily realities of retirement, the more enjoyable you will find it!

Getting your retirement plan into place takes time and effort. However, the hard work is worth it when you can enjoy the retired life you deserve. If you’re looking for ways to customize your retirement plan, get a handle on your finances, or make the best decisions in the housing market, let a broker be your guide. We will ensure you can make smart choices today that you will be thankful for tomorrow.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.