With close to two-thirds of Canadians having no company pension plan, it’s more important than ever for Canadians to grow their own retirement savings, so that they have additional income to supplement their CPP and OAS when they retire. Registered retirement savings plans (RRSPs) provide an effective way for Canadians to do just that.
An RRSP is a government-registered, tax-deferred plan that allows you to save your money faster. Any increases in your savings — including interest, dividends, yields and capital gains — will grow tax-free.
Also, contributions to RRSPs are tax-deductible. What this means is, the amount you contribute to an RRSP reduces your income, for tax purposes. Let’s say you contributed $10,000 to your RRSP in a year in which you earned $60,000, the CRA would only tax you on $50,000 in income. If you pay income tax at source, this would bring you a tax rebate of several thousand dollars — which you can then invest in your RRSP.
You will pay income tax when you start withdrawing from your savings, but one of the RRSP strategies is that by that time you should be in a considerably lower tax bracket and therefore pay less tax than you would today.
How much does the average Canadian have in an RRSP?
A recent RRSP study revealed how much the average Canadian has in an RRSP — $112,295. How much RRSP do I need? This will depend on your other retirement income. Most retirees withdraw 4% from their savings every year. This average RRSP savings amount of $112,295 would therefore bring you $4,491.80 per year — or just over $374 per month.
How much RRSP do I need for $1,000 retirement income per month? You would need to have RRSP strategies in place so that you have $300,000 saved by the time you retire.
One RRSP loan strategy that can help you get there is the RRSP gross-up strategy. This RRSP loan strategy is ideal for Canadians who don’t make the maximum RRSP contribution (for 2021, the most you can contribute is the lowest of either $27,830 or 18% of your income).
The RRSP gross up strategy involves taking out a short-term loan that you use to increase your RRSP contributions. You then use your tax refund to pay back the loan.
RRSP interest rates in Canada — savings accounts
To benefit from the tax breaks you get with an RRSP, you have to put your money in a recognized, registered RRSP account. Many financial institutions offer savings accounts that are contained within RRSPs, but these RRSP rates in Canada typically offer very low interest.
RRSP interest rates comparison websites (such as Ratehub) show that there can be a significant difference in RRSP rates offered for registered savings accounts. The lowest RRSP interest rates in Canada tend to be among some of the big five banks.
For example, Scotiabank’s RRSP rate of return for its RRSP Investment Cash account is as low as 0.01%. RBC’s Registered Savings Plans offer an RRSP rate of return of 0.025% for savings below $5,500 and RRSP rates of 0.05% for savings above that amount.
Not all savings account RRSP rates in Canada are this low. CIBC offers among the best savings account RRSP interest rates in Canada, at 1.25%. The only other company that currently* matches these savings account RRSP rates in Canada is EQ Bank, also with 1.25%. You can carry out your own RRSP interest rates comparisons by searching for “best RRSP interest rates comparisons + my province”.
How much will my RRSP be worth?
At these RRSP rates of return, your RRSP savings will actually be worth less in a year in real terms, than they are worth now. The Bank of Canada’s target inflation rate is 2%, though inflation rose to 4.4% by September of 2021. The Bank expects inflation to drop back to 2% in 2022, but even if it does, with an average RRSP return rate of 1.5%, your money will effectively be worth at least 0.5% less in a year’s time.
What is a good target RRSP rate of return for long-term investments?
As we’ve seen, savings account RRSP rates in Canada are not a good option for the long term. Even after carrying out extensive RRSP interest rate comparisons, the most you can currently get is 1.5% for RRSP-registered savings accounts. When saving for your retirement, you need a much higher average RRSP return rate to not only stay ahead of inflation, but also to grow your savings in a meaningful way.
What is the average RRSP return rate?
RRSPs can hold a wide range of investments other than cash. These include:
- Shares in companies
- Government and company bonds
- Mutual funds and exchange-traded funds (ETFs)
- Guaranteed Investment Certificates (GICs)
Most of these are likely to provide considerably better RRSP rates of return than the average RRSP return rates from savings accounts. RRSP GIC rates, however, can be similar to savings account rates. The best current RRSP GIC rate is only 1.75%, which isn’t going to deliver the kind of RRSP rate of return that you will need.
How much will my RRSP be worth if I invest in stocks and bonds? Most financial advisors recommend a portfolio mix of both shares and bonds, for long-term savings, such as RRSPs. How much RRSP returns you get will depend on how much of your portfolio mix is in shares (which typically deliver a higher rate of return) and how the market performs.
If you’re okay with taking on more risk, and/or you don’t intend to retire for some considerable time, a higher percentage of stocks should help your savings grow much faster and provide you with a more comfortable retirement.
The stock market has seen very good returns over the last few decades. The S&P 500 for example (stocks in the 500 biggest American companies) saw an average annual return of 13.9% between 2011 and 2020. Over the long term (between 1957 and 2018), its average annual return was around 8%.
Financial planners advise that if you keep a portfolio of 80:20 stocks to bonds, over a 20-year period, you should be able to ride out any stock market crashes and realistically enjoy returns as high as 7%. You can work out how much RRSP savings you will have by the time you retire by using an investment calculator, like this one from the Bank of Canada. Ideally, you should discuss your RRSP options with a financial advisor.
Find out more about RRSPs
Click on the links below to find out more information about RRSPs:
What is an RRSP and how does it work?
What is the withholding tax on RRSP withdrawals?
How to make the most of your RRSP Investments
How can you boost your RRSP retirement income?
If you’re like many Canadians, and have only saved around $112,000 in your RRSP (or even less), the income you’ll get from that probably won’t be enough to live the kind of retirement that you had planned.
If you’re a homeowner aged 55-plus, there is an easy way to increase your spending power during retirement. A CHIP Reverse Mortgage from HomeEquity Bank allows you to cash in up to 55% of the value of your home. You can choose to receive the money in a lump sum or regular monthly payments.
You can spend the money on anything at all – monthly expenses, home renovations, vacations, helping a loved one, you name it. Plus, you only have to pay back what you owe when you sell your home or move out. This means you won’t have the burden of having to make monthly mortgage repayments.
Contact us now at 1-866-522-2447 to find out how much of your home equity you could borrow, to boost your income and give you the retirement you’ve always dreamed of.
* All rates are as of November 2021.