CEO of Retirement Navigator outlines where he sees misconceptions and missteps at this crucial time of year
As RRSP season gets underway and advisors meet with clients to develop contribution plans, the CEO of Retirement Navigator says that everybody needs to be looking past RRSPs towards deeper questions about retirement. Doug Dahmer sees retirement as a huge opportunity for tax planning, but notes that an overemphasis on the RRSP as the core or even only savings vehicle for retirement can actually result in a far greater tax burden down the road as withdrawals become subject to tax once again.
Dahmer thinks that advisors and their clients need to begin RRSP season by asking the right questions. He believes advisors need to look out for tax traps in an RRSP strategy and find ways to avoid them. Finally, he thinks advisors need to look past RRSP season as an opportunity to grow their books and see it as a chance to set their clients up for long-term success.
“The problem with the vast majority of Canadians is what they’ve done is taken all of their retirement savings and put it into an RRSP,” Dahmer says. “January is now the 15th anniversary of the TFSA, so most of the baby boomers I talk to learned in their early ages that RRSPs were really the only way to save for retirement, and they’ve never dropped that mentality. What most people need to achieve is a balance between RRSPs, TFSAs, and open funds because each of those is taxed at a different rate and how you mix and match them will determine what your marginal tax rate is and whether it’s going to be clawed back by old age security.”
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Because most people earn their highest incomes in the years leading up to retirement, Dahmer sees a bias towards the immediate tax savings that come from an RRSP. While he is not anti-RRSP by any means, he believes the greater benefit of that registered account is the tax-free compounding opportunity it offers, as the taxes will still have the be paid once the RRSP converts to a RRIF and gets withdrawn. The TFSA offers an alternative vehicle for tax-free compounding that Dahmer believes more advisors should consider in the context of their clients’ retirement spending plans.
Because RRSP withdrawals are taxed, they can prove quite costly for clients when a major expense comes around. Dahmer cites the example of a new car, costing $40,000 – the full price of which has to be withdrawn from an RRSP. With taxes and old age security clawback, the withdrawal required for that car ends up costing significantly more than the $40,000 the car is worth. Dahmer believes alternatives to the RRSP can be used for those larger, foreseen expenses.
So why do advisors place such a focus on RRSPs? Dahmer believes that RRSP season is a convenient time to grow AUM by agreeing with clients who see RRSPs as the be-all and end-all of their retirement savings.
“Every financial advisor wants to grow their book, and the easiest way to do it is to agree with people who want to add for their RRSP. For most financial advisors RRSP season is their selling season,” Dahmer says. “True planners go at it from the standpoint of holistically looking at how people’s spending will be impacted in the future and closer to retirement figure out what the right balance should be for various investment types.”
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Dahmer sees wisdom in avoiding a pure RRSP-maximization approach. Holding back some unused RRSP room later in life, Dahmer says, can help a client tactically avoid things like old age security clawbacks up to age 71, which can be a benefit for a tax return.
Shifting focus away from simply maximizing RRSP contributions towards a more balanced approach that’s mindful of retirement income can be challenging, but Dahmer believes it will benefit advisors in the long-term. Respect, referrals, and client satisfaction are invaluable for any advisor and a plan that considers a wide range of strategies, outcomes, and tax circumstances can help an advisor win the admiration and loyalty of their clients. That work begins, in Dahmer’s view, by shifting the conversation around RRSP season.
“You need to turn the conversation on its head. Most people focus on the financial choices, and those financial choices ultimately dictate people’s life choices. If, instead, you start with their life choices, understand their cash flow needs, when they occur, and how they’re going to occur, you can make better investment choices.”
