The Great RRSP Conspiracy

"RRSP's are a warm gun, mama." The Commentator

When I first started out in financial services, I was a skeptical smart ass during the training sessions that covered RRSP's. A couple of us applied the Italian political adage, "qui bono" (who benefits) when it came to an investment vehicle created by the government.

Once on the job force I quickly wised up. No. I didn't fall into line. Far from it. In fact, following company policy wasn't exactly a specialty of mine. Like anything in life, moderation is key and I had to adjust my natural suspicions with a healthy outlook on things that did not fit my fancy.

I've come a long way. Cough. RRSP's (the equivalent to a 401k for Americans) is a registered retirement savings plan. It's premise is simple: save your money tax free. One of the problems with my trying to catch the government in a lie was that I was woefully incapable of dealing with the sophisticated numbers and mathematics involved. Nothing a little experience did not clear up. However, I fear too many people who fear or feel RRSP's are a hype don't truly understand its benefit.

Let's not try and complicate things. I've heard every argument in the pros and cons debate about RRSP's. Financially and mathematically people who are against it have precious little to stand on. For over five decades experts have analyzed and studied RRSPs and its benefits far outweigh its negative. One can dispute this all they want but in this case: numbers do not lie.

Where things begin to take a grayer turn is on a personal level. Life is about choices. It is about trade-offs and compromise. In economics, they call this opportunity costs. People are free to spend the $5 000 they may have saved any which way they see fit. If they want to live for the present and want to go on a trip rather than drop the money in an RRSP that's for every family to decide.

However, everything comes with a price tag. Every decision we make has financial implications. In this light, Canadians, on average, are terribly misguided. We are not considered a strong saver nation (like the United States. Conversely, Japan and Italy are) and part of the reason for this is because we remain, for all intents and purposes, a rather oblivious society when it comes to finance and economics. I've said in the past and will repeat it here: rudimentary economics should be taught in elementary school. Teach kids the value of a dollar and the power of long-term thinking.

It always struck me as insulting when people dismissed conservative explanations of RRPS's as being a stooge for the financial industry. That somehow naive door knobs were duped into selling a product pimped out by the government or bank. To think this way is to reduce a sound financial mind to irrelevance; to being a mere salesman for an unwanted product.

In this instance, gulp, I find myself in agreement with the government. They are merely exhibiting responsibility towards its citizens. Moving forward, they know that subsidizing Canadians to save will become harder. OAS and other government pensions are on their way to a severe pinch. We're not quite at the European level but not far away. Combining longer life spans and the baby boomer glut can only add up to one thing: pass on the responsibility of saving to the people. Have them account for their money.

So. How to convince people to save their money for the future? Well, ask them to set aside a portion of their income (subject to their earnings) to an RRSP where the money can grow tax free (dividends, interest, gains and so on) until retirement. If you are in a high tax bracket this can be incredibly helpful seeing that once you retire and convert your plan into a RRIF your marginal tax rate will be lower. The beauty in the RRSP idea is that it is a tax-deferral vehicle that helps people to wisely place their holdings to take advantage of compound interest. As the saying goes, compound interest is the most powerful thing in the universe. Ignore it at your financial peril.

Indeed, it all hinges on what investments you choose. If you decide to "play the markets"with your money you will probably lose. All basic financial models apply with RRSP's.

As I mentioned here, the debate against the benefits of RRSP's in terms of math has little merit and I won't rehash figures here. The studies are exhaustive and pretty stark.

I have heard so many misunderstood notions and very little of them stand up to sound financial advice. Too often, only one side of the coin was considered. Urban myths about its alleged hype was always the work of people who barely understood the dynamics of how an RRSP works and why it exists.My job was to widen the horizon for people. Once made clear, I could not force them into anything. As long as I did my job and gave all the information my clients needed to know to make an educated decision.

Of course, there are exceptions. But they represent a small fraction of Canadians. The major excuse used, however, was that people want to spend freely without feeling guilty. That's why they see the advertisement for RRSP with suspicion. I'm not for such things either, but in this case they could not be more flawed in their thinking.

RRSP's are a forward looking product. Its benefit is long term oriented and we live in a time where thinking 40 years out is not necessary. That must change. Do not apply a myopic world view in determining its worth. Be honest with yourself and seek professional advice. If the person in front of you questions its benefits my suggestion is to get a new advisor. Seriously.

I'm still a smart ass but it is now tempered with some common sense. Not everything needs to be challenged for its own sake. RRSP's is not something people should waste their time questioning. Time, well, is money.