A quarter of Canadians would dip into their retirement savings during hard times, a new HSBC study has found. And men are more likely to tap their retirement savings than women, at 27 per cent and 23 per cent respectively, according to The Future of Retirement: A new reality.
The Canadian report, which is part of a larger 15-country study on global retirement trends, involved more than 1,000 respondents and found that only 40 per cent of Canadians save regularly. The other 60 per cent have little or no choice but to take extreme measures to make ends meet when the going gets tough.
Sure, accessing your retirement funds is one way to cope when your car breaks down, you lose your job, or you have to fly across the country to see a dying relative. But it’s far from an ideal one.
“This might be considered easy in the short run, but it costs in the long run,” says Vancouver-based HollisWealth certified financial planner Laura Chanin. “There is a huge cost if you consider what the long-term value of that money would have been at retirement … and you’ll never get back that RRSP contribution room. Plus you pay taxes on the withdrawals, so you need to take out more money than you need to pay off the unexpected expense.”
If you have no choice other than cashing in RRSPs for an emergency, using a spousal RRSP first, suggests Markham certified financial planner Mark J. Halpern, president of illnessPROTECTION.com.
With a spousal RRSP, the higher-income spouse contributes to the plan and claims the tax deduction, while the money is considered belonging to the lower-income spouse. Provided the funds are not accessed within three years of the contribution, the higher-income spouse gets the tax break.
“If in the future there’s a need for money, it’s much smarter to take money out of that spousal RRSP because at least the tax hit will be much less,” Halpern says.
Of course, the best scenario is having savings set aside for emergencies and various forms of insurance lined up so that when life hands you lemons, you aren’t forced to set up a lemonade stand.
Besides using RRSPs, other ways of managing financial difficulty, according to the HSBC study, included withdrawing savings and investments outside of RRSPs (with 33 per cent of respondents saying they’d consider this approach) and downsizing (with 20 per cent saying they’d consider moving to a smaller home).
Meanwhile, 18 per cent of those surveyed said they’d borrow money from a bank, 17 per cent would sell their valuables, and 14 per cent would ask friends and family for help. Sixteen per cent said they don’t know what they’d do if a crisis occurred and they needed money fast.
“The most common place people find money for an emergency is using a line of credit,” Chanin says. “The problem with lines of credit is that they frequently don’t get paid off. The outstanding balance continues to generate interest, which … is one way that banks and credit unions continue to make money. You have to be very disciplined to pay off your line of credit and say no to spending on other things.”
Borrowing from friends and family can work, but you need to be disciplined here too. “Paying it back is the best way to keep relationships smooth,” Chanin says. “Many a friendship has been lost over debts not paid back.”
Turn to your life insurance policy’s cash surrender value
This is the sum of money an insurance company will pay the policyholder if the policy is voluntarily terminated before its maturity or the insurance event occurs. The cash value is the savings component the most life insurance policies. “That’s one way of finding guaranteed money,” Halpern says.
Make money off your home
Could you rent out a room through a company such as the San Francisco-based Airbnb or have an exchange student stay with you?
Increase your income temporarily
“Some examples would be to take on some different work during your off-hours or talk to your employer about ways to increase your income in your current job,” Chanin says.
Look to the government
Perhaps there are government programs, benefits, or tax credits that would apply to your situation. If you’re not in a position to do the research yourself, consider going to an accountant or other financial expert with knowledge in this area, Halpern says.
Cut back, for real
“People seem to spend how much money they make: as their income increases, so do their expenses,” Chanin notes. “So it might seem like there is no extra money, but if you lived on less in the past, there will be room. “