R is not for Retirement

I am going to quote directly from Timothy Ferriss' book The Four Hour Work Week:

"Most people will never be able to retire and maintain even a hotdogs-for-dinner standard of living. Even one million is chump change in a world where traditional retirement could span 30 years and inflation lowers your purchasing power 2-4% per year. The math doesn't work (Living Well, March 20 2006, Suzanne McGee). The golden years become lower-middle-class life revisited."

I am now going to quote Jonathon Chevreau's November 12 article:

Baby boomers around the world are ready to retire psychologically but not so sure they can pull it off financially, a study released this morning says.

“Around the world, adults who’ve worked their entire lives have differing visions of what they want their retirement to look like, yet unfortunately they struggle to make that vision a reality” said Liz Zlatkus, president of Hartford Life’s international wealth management division. Its research points to “a tremendous need for financial education and professional advice about investing for long-term goals.” The poll found “overwhelmingly” respondents are concerned about having enough money to retire.

These are major problems that I am facing with average Canadians who have simply invested a small amount each year into our most popular retirement vehicle: The RRSP.

Take a look at Chevreau's article from today. http://network.nationalpost.com/np/blogs/wealthyboomer/default.aspx

I am going to use this article to argue the fact that the R that stands for Retirement in RRSP is completely misleading and should simply be used as a tax savings device. The fact is this: even if a Canadian is maxing out her RRSP on a yearly basis she is still limited by the rules by which Canada applies for her contribution amount. If she is able to achieve a conservative return over the long run there is still the tax bite on the other end. Not only that but as every year goes on inflation is going to reduce the purchasing power of the money within the RRSP.

Studies have shown that if one were to invest all their money in equities outside of RRSPs that are subject to capital gains they can likely be better off in the long run. However, the motivation is not there for the average Canadian to invest outside of an RRSP due to the tax advantages of making contributions.

Therefore, the tax advantages of the RRSP when contributions are made are the main reason why someone should have an RRSP. That is a fantastic reason. This should be used as the only reason to look at RRSPs. Retirement planning has to be something totally separate from RRSPs.

The point that I want to get across is this: Canadians have to take a much more active approach towards financial planning. Simply investing every February into an RRSP is not enough.

Moves have to be made outside of registered investments. Conservative leverage should occupy a place in your portfolio if you are suited for it. Mortgages should be paid off rather than extended. Cash flow management should be an active topic in all families. Compounding debts should be avoided as much as possible. Monthly cash flow should account for budgeting towards savings programs and/or emergency funds. If you work does not supply a proper disability plan one should be looked into to provide income replacement solutions should there be that need.

As boomers age we are seeing the evidence that proper planning has not accomplished by many. Retirement is much like an insurance program. Something to fall back on should the time come that either we don't want to work or we cannot work any longer. Much like a suitable disability program there should be enough to fall back on to produce a sufficient stream of after tax income.

Simply investing in RRSPs is not going to provide that solution.