The marketing team over here at Planswell got some people upset in the first couple of months of 2018. Why? Because we spoke out against an annual tradition that the investment industry holds dear.
Every spring, real estate listings skyrocket. Every August, back to school sales proliferate. Every holiday season, retailers gear up to make half their annual sales. And, every January and February, the investment industry goes nuts for RRSP season.
Investing is essentially a seasonal industry, and the annual RRSP bash is driven by two main factors:
1. You have up to 60 days into each new year to make an RRSP contribution that can be applied to the previous years’ tax return. There is time pressure as the deadline approaches.
2. RRSPs are lucrative for banks, credit unions, financial advisors and robo-advisors because they know that money you put in an RRSP is likely to stay with them and generate fees for many years until you retire.
There’s nothing inherently wrong with these two factors. If an RRSP is the right choice for you, there’s no question you should hustle to beat the deadline. And the company that meets your needs should absolutely be compensated for it.
But is an RRSP truly the right choice for you? The advertising certainly seems to say so. Over here at Planswell, we couldn’t help but notice billboards, print ads, TV spots and digital banners everywhere urging every last Canadian to make an RRSP contribution.“Open a smarter RRSP today!” “Come in and open an RRSP before the deadline!” “Only 10 days left to contribute to your RRSP!”As financial planners, we were left scratching our heads a bit. Unless these advertisers actually know each Canadians’ personal financial situation, how do they know this is good advice? Should absolutely everyone contribute to an RRSP, or is there some nuance they might be missing?
We decided to dig into our own data for answers. By the end of the 2018 RRSP season, Planswell had delivered over 20,000 financial plans to our users. These plans represented Canadians from all walks of life – from recent graduates to those nearing retirement, from big cities and small towns, and across the income spectrum.
We found that about 38% of the time, our financial planning engine did not recommend contributing to an RRSP.
In other words, the massive annual RRSP advertising blitz, backed by all the biggest financial institutions in the land, was giving objectively bad advice to about 1-in-3 Canadians.
Our findings certainly challenged the common wisdom, so we dug a bit deeper to try to find the disconnect. We found several reasons why an RRSP was not the recommended investment option for thousands of our users, some of which might apply to you. Here are the top three reasons:
Your tax bracket doesn’t support it
An RRSP is not meant to avoid tax, but to defer it until later. The idea is that you are probably in a relatively high tax bracket while you’re working, and in a lower one when you retire. But some people are already in a low tax bracket. Others will be in a higher tax bracket in the near future, once their career gets going. For these folks, it probably makes sense to wait before contributing to an RRSP.
You have more pressing needs
An RRSP is meant for retirement, years down the road. According to financial planning best practices, you shouldn’t make that type of long-term investment until you’ve covered your short-term bases first. For example, if you don’t have an emergency fund set aside or if you’re planning to buy a home or make a major purchase within the next few years, it may not make sense to lock your savings away in an RRSP.
You have bigger opportunities
Let’s say an RRSP makes sense from a tax point of view and you have your short-term savings handled. You’re good to go, right? Not necessarily. If you owe $3,000 on a credit card at 20% interest and you’re contemplating a $3,000 RRSP investment that might earn 8%, you’re instantly ahead by 12% if you pay your debt first. Similarly, if you don’t have insurance to protect your earning power and your kids’ future, those are usually higher financial priorities than making an RRSP contribution too.
There are many reasons to not “hurry up and contribute before the deadline,” and we believe the financial industry is doing a tremendous disservice by pretending that everyone in Canada should take their advice.
Armed with our financial planning knowledge and data from 20,000 plans, we took out some ads letting people know that an RRSP might not be the right choice for them.
Perhaps predictably, we received some vitriol in return – mostly from financial advisors who didn’t appreciate us messing with their big annual marketing campaign. One even said we had no business helping people manage their money if we don’t even understand the “basics” of retirement planning.
Fortunately, we received many more inquiries from regular people who wanted to benefit from what we were teaching.
Would we do it again? Absolutely! At Planswell, our mission is to enable Canadians to maintain a consistent lifestyle throughout their lives. That means maximizing the amount of after-tax money they have access to when they need it. We always do the math to find the best answer, regardless of the common wisdom or the banks’ seasonal marketing cycle.
Are you part of the majority who should be using an RRSP, or are you part of the sizeable minority who should be doing something different? The easiest way to find out is to build your free financial plan in the next three minutes.