Are retirement savers too focused on the short term?

Are retirement savers too focused on the short term?

Are retirement savers too focused on the short term? Tax-free savings accounts (TFSAs) were instituted in 2009, while registered retirement savings plans (RRSPs) have been around since 1957. However, numbers from the Canada Revenue Agency (CRA) show TFSAs have been receiving more contributions than RRSPs in recent years — and that could be a concern.

“While people are saving increasing amounts from year to year, they’re also pulling out a lot of money,” Rob Carrick, a columnist for the Globe and Mail, wrote in a recent column. “This may help explain why TFSAs are usurping RRSPs – it’s way easier to withdraw money from a TFSA.”

According to Janice Holman, a principal at consulting and actuarial firm Eckler, TFSAs are seen as more flexible and forgiving than RRSPs. People like that retirement income from TFSAs will not result in a clawback of old-age security benefits or the guaranteed income supplement. Another plus for TFSAs is that money withdrawn from a TFSA can be replaced; for RRSPs, withdrawing money means losing an equivalent amount of contribution room.

RRSP withdrawals are also costly and cumbersome. Withdrawals entail withholding taxes, and could result in additional tax once the accountholder files their income tax return — a top complaint among seniors.

Citing the CRA data, Carrick said TFSA contributions were marginally larger than those for RRSPs in 2013. But in 2014, TFSA contributions grew 14% to reach $45.8 billion, while RRSP inflows increased only 2.8% to $40.5 billion.

Based on the most recently available numbers, registered retirement accounts, which include RRSPs, still trounce TFSAs in terms of total assets. In 2012, Statistics Canada pegged the total assets in RRSPs as well as registered retirement income funds (RRIF) and locked-in retirement accounts at almost $960 billion. On the other hand, the fair-market value of TFSA assets in 2014 was $151.6 billion.

In 2014, the $45.8 billion in TFSA contributions were offset by $18.4 billion in withdrawals. In the case of RRSPs, CRA numbers for 2015 showed close to $41 billion in contributions and $15.4 billion in withdrawals.

While some of those withdrawals were made by retirees who had not yet converted their savings into an RRIF, there seem to be more people embracing the use of RRSPs as a source of cash before retirement. From 2009 to 2015, RRSP withdrawals rose by 4.6% on average, outpacing contributions which rose at just 2.8%.

Holman also reported that almost all withdrawals from the workplace group RRSPs she tracks are done in cash. She noted minimal use of the federal Home Buyers’ Plan, under which up to $25,000 can be withdrawn for a down payment for a first home. “We know a lot of home buyers are using the HBP – clearly they’re dipping into their personal RRSPs as opposed to their group RRSPs at work,” Carrick said.

According to Holman, cash withdrawals from group RRSPs have to be explained to the plan administrator. The reasons she’s heard boil down to one thing: people want to spend money they’d initially set aside to save.

“People have become so short-term focused,” she said. “It worries me a lot that they are not going to have sufficient RRSP savings.”

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