Retirement Planning & Seasonal Financial Disorder

Here we are closing February in Canada, the end of “RRSP season”, in the crunch as if it was the only season to be retirement planning, almost suffering from seasonal financial disorder. We could call it the silly season: motivated sellers of RRSP-eligible investments pursue possible sales “prospects”, many of whom are as confused about what they are doing, as deer caught in headlights on a country road.

The theory of RRSPs is that they will help those working people with no workplace pension plans who are motivated to save for their retirement. These workers will put aside funds in a tax-advantaged plan from which they will access an income in retirement. There are a few problems with this theory. The first is that not everyone needs an RRSP – some people have other assets or plans, which they’ll use to fund their future retirement.

RRSP’s & the acronym alphabet of disorder

0202gail.jpg.size.xxlarge.promoThe second problem is that not everyone wants to put money into an RRSP if it means that their other living expenses are curtailed because they do not have the cash flow to make regular (or irregular) RRSP contributions at a particular point in time. A third difficulty is that for some people, especially on low-income, an RRSP makes no sense. They have no tax liability; they live a simple existence and do not expect to need more in the future. In other words, the minimum payouts from CPP and OAS, plus the Guaranteed Income Supplement (GIS), will be sufficient in their retirement. However, they could augment their retirement income through the Tax Free Savings Account (TFSA) plan.

In what seems to be a new era for Nanny State programs, some governments, notably Ontario, feel that everyone must have a retirement savings plan. Despite the opinions of pension and economic experts – that government-mandated plans actually decrease individual saving for retirement and put a damper on small businesses, which would otherwise increase the number of employees – governments want to forge ahead with these feel-good policies.

For many Canadians, their best choice of financial acronyms may be the TFSA, which has the advantage of being a more flexible savings option. Financial security is the goal of good financial planning. The RRSP program may, or may not constitute good financial planning for some people. This brings us to the whole topic of financial literacy.

Advocating a financial literate consumer

The concept of financial literacy is that an individual consumer is able to rationally evaluate and make informed decisions about personal finances, including the purchase of financial products. Financially literate people can separate the sales “fluff” from hard facts. The key question is “Who benefits?” Is it the client or the advisor? Or is it a win-win?

The world of personal finance includes the sale (and the purchase by the consumer) of financial products, whether those products are mutual funds, savings vehicles, stocks or bonds, real estate or commodities, or various types of insurance. The risk to consumers at any age is that they can be sold inappropriate financial products – often at unreasonable cost.

As yet, a fiduciary standard has not been set for all Canadian personal financial planners, and this proposed consumer protection-oriented standard is being fought by the various industry groups concerned about a reduction in income for advisors and in the number of advisors. Financial services, such as financial products, should offer solutions to the needs of consumers.

Often, solutions offered by advisors are geared to how much money the advisor will make on any given transaction. The financial service companies, which develop financial products, devise marketing programs for these products or services. Sometimes, the advisors oversell particular products, to the detriment of the consumer.

Achieving a balance between making financial products or services available to the consumer and yet providing a fair return to advisors is still a problem in Canada. Other jurisdictions have eliminated commissions on financial products because of potential conflicts of interest between the advisor’s advice and the real needs of the consumer. It looks like such a standard is a long way off in this country, given that our closest neighbour, the U.S.A., is not contemplating such a policy change.

The old adage, “If something sounds too good to be true, it probably is” (that is, the something is not true!), is a good motto for careful consumers.

Marie Howes, PRP