Registered Retirement Savings Plan (RRSP)
An RRSP (registered retirement savings plan) is an investment account that is registered with the Canadian government and is used as a vehicle to save for retirement. An RRSP is different than a typical investment account because it provides specific tax benefits meant to encourage you to keep up with your retirement savings. What does it mean to have tax benefits?
In the case of an RRSP, your contributions are tax deductible, which means you can deduct your contribution amount from your income each year and only pay taxes on the remaining amount. For example, let’s say Susie makes $50,000 and contributes $4,000 to her RRSP. She would only have to pay income taxes on $46,000 ($50,000 – $4,000).
You also don’t have to pay taxes on any of your earnings as long they stay in your account. Instead, you only pay taxes on the money that you withdraw in retirement which is referred to as a tax deferral benefit.
In plain English, this means that you not only get to contribute to your retirement savings tax free each year, but your savings also grow tax free – a great benefit that should not be overlooked.
Because of these generous benefits, RRSPs have a few restrictions like annual contribution limits and specific eligibility requirements.
Imagine this. You’ve just retired and have spent the last 45 years diligently saving for this moment. Suddenly, your goal is no longer wealth accumulation, but rather spending the savings that you’ve built up over the years. You have to figure out how much is reasonable to spend each month while still saving enough to live comfortably, hopefully for the next few decades. This process is called retirement spending.
What else do I need to know?
Retirement spending is very similar to the process of deaccumulation. deaccumulation involves strategizing about the best way to spend the savings you’ve worked hard to accumulate during your working years based on critical factors like your current income streams, investment strategy, personal goals, needs and plans for an inheritance.
Most of us spend our entire adult lives at least vaguely aware that saving for retirement is a critical aspect of our financial health. However, saving for retirement is only half of the puzzle.
Once we actually reach retirement age, we’re presented with a new challenge – how to spend the savings we’ve worked hard to accumulate during your working years. This process is called deaccumulation and it requires a completely different skill set than what is needed to accumulate wealth.
To spend effectively in retirement, there are critical factors to consider like:
Income – what are your income streams?
What is a reasonable amount to spend each month that allows you to enjoy life while still saving enough for the future?
What are your needs and wants? Do you have any personal goals you’d like to reach while in retirement, like traveling the world or spending time with family?
Do you want to leave an inheritance?
Answering these questions will help form the basis for your deaccumulation strategy. Given the specialized skill required to successfully manage retirement funds, it may be helpful to consult a financial advisor for guidance.
What else should I know?
Some financial advisors may be well versed in wealth accumulation but may not truly understand the intricacies of deaccumulation.