To a financial advisor, an RRSP is one of the fundamental building blocks of financial planning. But a lot of regular folks haven’t gotten the message. And they’re not all living high off the hog, spending frivolously on passing whims. Many have been so preoccupied with mortgages, bills and putting their kids through university that they simply haven’t had any money left over for RRSPs.

Only a fraction of Canadians maximize their RRSP contribution room, and surveys show that two-thirds of taxpayers don’t even have an RRSP. As advisors, you may find these procrastinators on your doorstep as reality seeps into their consciousness and they are hit by the realization that they have to do something.

“People in the 35 to 45 age bracket are a huge demographic, and many have not addressed retirement,” says Peter Andreana, a certified financial planner with Freedom 55 Financial in Mississauga, Ont. “Procrastinators have certainly crossed my threshold.
Some are people who are living for today and buying the material goods they can afford, such as plasma TVs or Harley Davidsons, while others are caught between conflicting demands for limited funds. The problem is that people want to retire as soon as possible, but they are living longer, so there is pressure at both ends. People can’t sell their consumer goods to fund retirement.”

The anxiety and the urgency to save intensify the longer the problem is postponed, advisors say. As the amount required to meet retirement goals increases with delay, the dream of retiring at 55 gets pushed to a much later date.

Tony De Thomasis, president of De Thomas Financial Corp. of Toronto, says most people in their 40s who are without retirement funds are victims of poor money management. He spends a lot of time helping them reorganize their financial affairs, getting rid of their high-interest debt such as credit card debt, and taking advantage of anything that can be made tax-deductible. Together, he and his clients figure out where the money is going, and find ways to come up with some savings.

“Some people can refinance or extend their mortgages, thereby lowering their monthly payments and freeing up some money that can grow tax-deferred in their RRSPs,” he says. “Others are leasing cars, and can lower the payments.”

De Thomasis is a fan of savings plans that automatically transfer money from bank accounts to investments such as mutual funds, and recommends the absolute maximum amount that the client can afford.

Other advisors have had success in getting clients to start investing a small amount through automatic deductions, then notching it up as clients find they can get along with less and become accustomed to the process.

“Start with something and get a client used to saving,” advises Andreana. “If you don’t start, there won’t be any savings at all. You can increase the amounts later.”

Most clients don’t realize the power of compounding and think they can just save a little more after they turn 40. But the math doesn’t work that way. A 40-year-old would have to save at many times the rate of a 20-year-old to reach the same retirement goal in 25 years that a 20-year old has 45 years to reach.

Although not all advisors are fans of leverage, De Thomasis believes borrowing is the only way to make up for years of missed growth. In addition to making up for past RRSP contribution room, a borrowing strategy can be employed to boost a retirement savings plan outside an RRSP. If the loan is made for investments held outside an RRSP, the interest costs are tax-deductible.

De Thomasis typically sits down with a client to determine what the client can afford in loan-carrying costs, and then reduces it by a third. For example, if the client can afford annual carrying costs of $6,000 a year, he shaves the figure down to $4,000 for an extra margin of safety, and then calculates the amount that can be safely borrowed based on current interest rates. The client can then invest the $2,000 difference on an annual basis and, if things get tight, will have the flexibility to reduce this amount.

Not all advisors are keen on borrowing, and believe many clients are not cut out for the stress that may accompany leverage. Borrowing to invest is an aggressive strategy that can backfire if markets turn downward. And so is investing in high-risk products that promise juicy returns, although they are tempting to people looking to turbocharge their portfolios and make up for lost time.

@page_break@But, De Thomasis says, if borrowers have a reasonably long time frame and they have learned something from market history, they will be less frightened by short-term market cycles that can have a dramatic effect on a leveraged portfolio.

Research on the S&P/TSX composite index shows that between September 1981 and March 2005 there have been 180 rolling 10-year periods. The best 10-year period showed a gross return of 325% and the worst was 90%; the average 10-year total return was 155%. At current low borrowing rates, a portfolio needs only to do moderately well for the client to be ahead of the game, especially if interest costs are deductible. Often, investment loans can be obtained at close to the prime rate, which is currently 4.75%, but tax deductions for the interest could reduce costs by as much as half.

“A person should be looking at paying off a loan a few years before retirement,” De Thomasis says. “Leveraging is a great way to kick-start growth, as it gets a lump sum invested right away. The key is to make sure the borrowed amount is not too large, as that is what can get the client into trouble.”

Jamie Golombek, vice president of taxation and estate planning at AIM Funds Management Inc. in Toronto, advises paying off any loans quickly so that interest costs don’t eat away at returns. He suggests a borrowing strategy could be used to make up for unused RRSP contributions from the past, and that the loan should be reduced as soon as the client receives his or her tax refund.

“At least half the loan can be paid off by the tax refund, and the advisor can help the client put a plan in place to pay the rest off quickly,” Golombek says. “Remember that with an RRSP loan, the interest is non-deductible, so it should be paid off as quickly as possible.”

Jim Rogers, chairman of Vancouver-based Rogers Group Financial Advisors Ltd. , says it is important to help clients face reality, determine what they need to save to make up for lost time and devise specific strategies to find the money.

Often Rogers will set up a regular automatic contribution plan for a client that covers both the current year’s contribution as well as a portion for unused room from the past.
He says it makes sense to put as much money as possible into an RRSP in order to take advantage of the income deduction and the deferral of taxes on gains, which essentially amounts to a “tax-free loan from the government” until money is withdrawn.

“No client is well served by mollycoddling, and you can be candid without being hurtful,” Rogers says. “The goal is to help clients find their way through the problem by presenting appropriate measures. They may not have acted in the past because they ignored the problem or nobody pressed them.”

Many people are discouraged by the huge amounts they need to save to accumulate the large sums required to support a retirement that could last 30 years. However, once penny-pinching habits are established during the saving years, they can carry over into a more frugal lifestyle after retirement.

“For the late starter, expenditures may need to be reduced dramatically, both now and in retirement,” says Warren Baldwin, regional vice president with T.E. Financial Consultants Ltd. in Toronto. “People may need to look at downsizing their homes, which can free up capital and reduce costs. They may have to work part-time in retirement or delay it by a few years.

“It’s a goal-oriented discussion,” he adds. “The key is to draw the line in the sand and then figure out a way to get there.” IE