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Real Estate is the new RRSP
This year we're spending our RRSPs. With stocks and bonds yielding so little returns, more and more Canadians are taking their savings and splurging on second homes, boats and renovations.
Sam Cohen knows all the arguments in favour of sinking his savings into an RRSP. He has been a financial adviser in Toronto for the past 10 years, helping clients pick the mutual funds that are supposed to finance their golden years.
But somewhere along the way, Mr. Cohen lost the faith. Six years ago, he stopped making his annual contribution to a mutual-fund-filled registered retirement savings plan. Instead, he started investing directly in real estate. He has never looked back.
Mr. Cohen has bought and sold raw land, and doubled his money. He has been in and out of condos, and is up 40 per cent for his troubles. He picked up a dump of a house and renovated it himself, and expects to double up on that holding too. All told, he has built a $1-million real-estate portfolio.
"I'm not playing a real-estate boom," Mr. Cohen says. "I'm sticking to properties because I believe that I can do better this way than by trying to pick the right stocks and funds in an RRSP."
An increasing number of Canadians share Mr. Cohen's view. As Canadians rush to file their tax returns before May 2, more than 60 per cent of the population will leave line 208 blank -- that's the box on the tax form set aside for RRSP deductions.
Real estate is in vogue, everything from buying a first home, to moving to something bigger, to renovating. So is splurging -- purchasing a cottage, or a boat, or a dream vacation. Saving for retirement, in a conventional stocks-and-bonds plan, is definitely on the outs.
The number of citizens who contribute to RRSPs has been in steady decline since the stock market melted down in 2000. Fewer than six million taxpayers set aside money in their RRSPs last year, or roughly one in three of those eligible, according to numbers compiled by Statistics Canada. Just five years ago, when Nortel Networks could do no wrong and markets were booming, close to 6.29 million people contributed to retirement plans.
RRSPs soaked up $29.3-billion of our savings in 2000. That was down to $27.6-billion last year. So not only are fewer people using RRSPs, but those who do are saving less. These plans are the only significant break left for a tax-weary population. The rules allow us to set aside up to 18 per cent of what we earned last year, to a limit of $15,500.
Well, the average contribution last year was $2,600. Those living in Alberta and B.C. set aside closer to $3,000, while savings in the four Atlantic provinces came in closer to $2,000. When tax returns are filed on May 2, there will be 18 million Canadians walking around with extra room left in their RRSPs -- fewer than one person in 10 maxes out their contributions.
The folks in the financial trenches understand what has happened.
"Many investors have soured on markets, and it's hard to blame them," said Charlie Spiring, founder and CEO of brokerage house Wellington West Capital, in Winnipeg. "There's been a debacle in the funds, first with the poor performance, then all the issues around malfeasance, with [New York Attorney-General Eliot] Spitzer on the warpath."
Like many industry experts, Mr. Spiring sees larger social forces at play in the move away from RRSPs. He has firsthand experience with clients who would rather enjoy their money today than sock it away for tomorrow. People work hard, and as a reward, many opt for something tangible, some sort of instant gratification, rather than the delayed pleasure of retirement income.
"The Manitoba government opened up a few new lakes for cottages this year, and there was a stampede of buyers. You just know some of those people were spending cash that they otherwise would have socked into their savings," Mr. Spiring said. "With older, more affluent individuals who are still working, there's a tendency to spend money in order to build the kind of retirement that they've always dreamed of."
Cottages aren't the only indulgence going.
At the Beaconsfield Yacht Club, in the Montreal suburbs, you will find a former Air Canada executive in his late 50s -- he asked not to be named -- who dropped $10,000 of his recent severance package on a used C&C 24-foot sailboat, rather than putting it all into a retirement fund.
April 29, 2005 in Watching the Market | Permalink | Comments (0)
