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What's the Best Retirement Investment for Canadians?

If you have a bit of money to invest, there are a lot of different options for how to invest it for retirement - leave it in the bank for interest, invest in a short term instrument with a guaranteed return (GIC), put in the money in the market, buy crypocurrency, buy real estate....the list goes on and on. But there is one investment that has been the best for Canadians since its introduction in 1957 - the Registered Retirement Savings Plan (RRSP).

Most people know that RRSPs are the primary way the government has incented Canadians to save for retirement. With fewer and fewer employees getting company sponsored pensions and the Canada Pension Plan (CPP) not offering sufficient for retirement, most Canadians have a least something invested in an RRSP. Savvy investors have taken full advantage of them by maxing out their investments ($26,010 in 2017 or 18% of earned income) as the RRSP has several very important benefits.

  1. You get immediate tax savings since the contribution drops your taxable income. In other words, you get taxed as if you never had earned that money, often keeping you out of high tax brackets.

  2. Any return on the investment you make is tax-free until withdrawal (with the idea that you’ll withdraw it in retirement when you have lower income and therefore pay lower taxes).

  3. Automated deductions at source if your employee administers the RRSP. According to Statistics Canada about 40% of Canadian employees have access to an RRSP (2015) at work. When offered by the company, you can usually set up to have your investments taken out of your pay each pay period. It is much easier to save if you don’t even touch the money!

  4. A company match for some employees. This final benefit is the most important of all to those of you lucky enough to have it. Many companies offer company matches to encourage saving for retirement. In this case the company will match your contributions in some way (often dollar for dollar) up to a limit (perhaps 2-3%). This contribution by your employer is free money to you, making it even more beneficial to invest if an employer match is offered.

There is no better way to invest than employer-matched RRSPs, so try to put as much as you can afford into your RRSP as early as possible. Reducing your tax rate, getting an employer match in many cases and enjoying the benefits of compound interest are powerful reasons to consider regularly investing even a small amount as early as you can. If you only do one piece of investing your whole life, try to maximize your RRSP contributions each year. If you work for 30-40 years and you do a good job of maxing out your RRSPs, you should be in good shape for retirement. For example, if you can invest $25,000/year (current maximum) in RRSPs for 40 years (25 to 65), then you’ll be sitting on a nest egg of $7.6 million dollars at age 65 (at 7%). Of course, it is very difficult to maximize RRSP contributions each year but you can see the power if you even get close to achieving this.

Enjoy the best retirement investment option and thank you Canadian Government.

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