Financial advisor weighs in on Canadians' common RRSP mistakes, and why GIC investors should keep an eye on the CPI
With tax season just around the corner, countless Canadians are just gathering themselves for the annual rush to meet the RRSP contribution deadline. And according to one advisor, that reactive mindset can lead to a lot of missed opportunities.
“I think a lot of people aren’t thinking forward to the future,” says Justin Prasad, financial advisor at BlueShore Financial. “They're just looking at if they owe any taxes, and how much they need to contribute. They’re not really looking at the bigger picture.”
From Prasad’s perspective, Canadians by and large are missing out by not looking at their notice of assessment and seeing how much room they have in their RRSPs in 2023, and where their lifetime contribution amount stands. Many 30- to 40-year-olds, he adds, don’t explore the benefits of the First-Time Homebuyer Incentive and the Lifelong Learning Program.
“They might not be using that today, but it could benefit them in three to five years’ time,” Prasad says.
For many Canadians, contributing to RRSPs is more challenging today compared to previous years. Prior to last year, Prasad says he’d generally project inflation between 1.5% and 2% when making financial plans for clients. But after the headline inflation peak of 8.3% in 2022 – a four-decade high – investing for retirement is looking much more daunting.
According to recent research from Questrade and Leger, three quarters (74%) of Canadians agree that inflation has impacted their ability to save. Nearly as many (69%) are concerned about the impact inflation may be having on their RRSPs, and 57% say they have less money to contribute to their RRSP every month compared to a year ago.
“If we get into a situation of sustained inflation over five to seven years, like it was in the late ‘70s and early ‘80s, clients need to look at updating their financial plans,” Prasad says. “If you’ve been seeing lower returns over the last couple of years, but you’re also projecting higher expenses in retirement, you’ll essentially need to save more.”
After seeing already-low yields on fixed income collapse to near-zero in 2020 and 2021, Prasad says investors were only too happy to chase returns and ride the COVID market rally.
But as extreme price increases and rising rates brought valuations crashing down to earth, he sees a flight to safety playing out as clients put their money in GICs with yields in the neighbourhood of 5% – a healthy increase over the past few years, but still a losing bet when you count the inescapable tax of inflation.
“That’s great if you just look at the sticker amount,” Prasad says. “But the reality is that in the past few years when inflation was around 2% and term deposits were paying out roughly the same amount, your savings were just keeping up. Now, you’re actually behind.”
What goes up must come down, as they say, but the critical question is when. If inflation starts moderating in a meaningful way – the Bank of Canada expects CPI will cool to roughly 3% in the middle of 2023, and come down to its 2% target rate next year – a 5% yield on a GIC will be well worth it. But if the projectile motion of inflation were to follow a years-long arc, investors would need to do more to build and preserve their nest eggs.
“If you are risk-adverse, then absolutely, GICs with a 5 % rate of return make sense,” Prasad says. “But if you're a growth-oriented client with 10-plus years left before retirement, I would say this a good opportunity to buy into the equity markets as they tend to perform better than GICs or bonds over time.”