Dear Expert:
I have a question that no one seems to want to answer. I am 43 years old and I was unemployed for most of my 20s and 30s. I currently have $5,000 in my RRSP and, now that I am employed, I am contributing $100 monthly to my plan. Is this enough? I will receive approximately $16,000 a year upon retirement from my Old Age Security and Canada Pension Plan, plus an inheritance from my mother (around $50,000) and my RRSP. At the same time, I need to save to buy a condo or a house. I know that I wasted a lot of valuable compounding time for my RRSP by not investing sooner, but the damage is done. What can I do now to maximize my RRSP, buy a home and make my situation not feel so desperate?Expert Opinion:
Unfortunately, the reason that no one seems to want to answer your question is that the question you asked and the information you have provided is incomplete and as such cannot really be answered.
Some general comments can be made and the first one that I would provide is that I would not consider any inheritance from your mother as part of your retirement plan. Given your age, I would assume that your mother is not extremely elderly, that her health is currently reasonable and that she will live many more years and may in fact need some or all of this $50,000 for her own needs later in her life. The only time I would ever consider an inheritance as part of a client's assets is if the estate was in the process of distribution currently. Otherwise, there is just too much risk that these funds will not be received.
I would assume that you intend to retire at age 65 since retiring early seems to be something that would not work given your late start in saving for retirement. As you stated, your RRSP is very small and if this is the only source of retirement income (you did not mention if your employer has a pension plan), then your $100 per month is not going to add much to that retirement income. For example, from age 43 to age 65 you have 264 months of contributions in front of you. The total of these $100 per month contributions on top of the $5,000 in the plan so far plus investment return over the next 22 years might reach $70,000 by the time you retire (assuming a 6% return).
Your $70,000 RRSP at age 65 could be expected to generate between $4,000 and $5,000 per year on top of the $16,000 per year from your government pensions. At this level of $21,000 or so per year of income you would be likely to pay $3,000 of taxes on an annual basis. At best, this will leave you with a net income of about $1,500 per month for all your living expenses including food, rent, transportation, vacations, etc. Therefore if you are living on more than $2,000 a month today certainly you will not have enough to support your lifestyle in retirement. (It is unreasonable to expect that your lifestyle will be dramatically more affordable in retirement than it is today.)
You do not mention any other savings that you might have set aside for the purchase of your condo or house. If in fact you do not have any other savings for this purpose, then it would seem that this idea would not be feasible for you at this point and you may be better off concentrating all your savings towards your RRSP in order to build a proper retirement level of income for yourself.
You may find it worthwhile to consult with a professional financial planner to insure that you have a plan to track your savings for retirement. You don't have much time to make up any shortfall that you might be facing at age 65.
No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
To find out how much an RRSP contribution may save you, try Morningstar's RRSP Calculator.
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