How to protect your RRSP savings
Posted by Admin on April 28, 2010
Another registered retirement savings plan (RRSP) season has come and gone. If you’re like many Canadians, you’ve probably squirreled away some hard-earned dollars in hopes of a comfortable retirement.
However, your retirement planning shouldn’t stop there. Your RRSP savings are vulnerable to many different risks.
Events that can cut into your RRSP savings
While it’s only human nature to look forward to the positive, it’s important to remind ourselves that serious health problems and an early death are also a part of life. Unforeseen events can derail your carefully thought-out plans and have a devastating impact on your family finances.
Imagine having to dip into your RRSP savings, due to the sudden loss of your spouse, in order to make the mortgage payments and help with your children’s education. Situations like this not only expose you to greater taxes, but can also threaten your retirement income – especially if you have to sell investments when markets are down.
However, what if you have to withdraw cash from your RRSP? What if you just stop contributing to it during hard times? Unfortunately, that can also shortchange your retirement nest egg, as shown in the following example.
Example: The Campbells
At age 40, Bill and Amanda Campbell begin contributing $500 a month to their RRSPs. Five years later, a car accident leaves Bill disabled. The Campbells decide to postpone RRSP contributions until Bill has fewer medical expenses and can work again.
Four years pass before Bill fully recovers and finds a new job. The Campbells now feel financially comfortable again and resume their RRSP contributions.
By age 65, they have saved $270,964 1 for their retirement. However, if they hadn’t interrupted their RRSP contributions, their savings would be $339,790. That’s 25 per cent or $68,826 more than the current value of their RRSP.
In hindsight, the Campbells would be better off if they had made disability insurance part of their financial security plan. Now they’ll probably have to adjust their standard of living during retirement to make their reduced savings last longer. If this example involved early death or critical illness, their financial loss could have been much larger.
The benefits of having insurance
As we’ve seen, your financial security depends on more than RRSP contributions alone. That’s why, as you continue to pursue your financial goals, you need insurance to help protect your family and your retirement dreams.
For example, if you’re faced with a serious illness, premature death or disability, you may need cash quickly. Cashing out your RRSP savings in a hurry can negatively impact your investment portfolio. However, permanent insurance has a cash value component that can provide you with cash when you need it most, without interrupting the long-term growth of your retirement savings.
The cash value of permanent insurance can help protect you and your family by providing income during difficult times. You can use insurance cash value funds to:
- Pay the mortgage so your family can stay in your home
- Pay off debts and lines of credit
- Protect your family’s standard of living
- Ensure your children can afford college or university
- Help keep your business running
- Cover unforeseen funeral and medical expenses
Why start with insurance today?
As you get older, insurance available to you today may become more difficult to obtain and it’s likely to cost more. If a health problem arises before the policy is in place, your application could be declined, rated or issued with an exclusion. Therefore, it’s best not to delay.
Some people put off purchasing insurance, because they think they can’t afford it. They also don’t want to reduce the amount they can save for retirement. However, you don’t have to shortchange your retirement savings to buy the insurance protection you need. You can choose from many types of insurance, each with different levels of coverage, at prices to suit almost any budget.
I can help you determine how much coverage you need to meet your goals and stay within your budget.
1 Assumes monthly growth rate of 0.5 per cent (6 per cent per year). No contributions or withdrawals made from age 45 to 49. Initial balance continues to grow to age 65.
This article is for information purposes only and shouldn’t be construed as legal or tax advice. Every effort has been made to ensure its accuracy. However, laws and interpretations may change, so errors and omissions are possible. All comments related to taxation are general in nature and are based on current Canadian tax legislation for Canadian residents, which is subject to change. For implications as they relate to individual circumstances, consult with legal or tax professionals. Information is provided by London Life Insurance Company and is current as of December 2009.