As with everything in life, one size does not fit all. What will work for one person may not be right for you.
The financial system is generally not designed with a primary objective of our wellbeing. It may come as a surprise to some, that banks, mortgage lenders, creditors, and even the government have designed their business around serving them first. They are not generally dishonest about how their programs and products work, but they may not be completely upfront in explaining the full impact to you, in the short and long term.
That leaves the onus on us to dig deeper and understand how the various financial programs and products work and what the risks and costs are.
Look at the RRSP system in Canada, for example. It is promoted on the premise that you SAVE taxes. But when one takes a closer look, the truth is that it may simply defer taxes. You see it is a tax deferral (aka –postponement) system. The premise is that you will be in a lower tax bracket in retirement, than you are during your working years – the focus being the tax bracket vs. the amount of money being taxed and who is in control.
The questions we need to be asking ourselves are:
- Will we really be in a lower tax bracket?
- Do we think the government will need more or less taxes in the future?
- Did we know that when we retire, we won’t only be taxed on our contribution, but we will be taxed on all the growth – potentially decades worth of growth! Doesn’t that translate to actually paying more tax than we originally saved in the first place?
- Do we know what the rules are when it comes to producing an income from our RRSP savings and how will this impact other sources of income?
I don’t want to imply that the RRSP system is all bad or not right for anyone. I am simply trying to express that it is important to breakdown the misinformation and understand exactly how it works and whether it is the right choice for each of you, at this time in your life. The RRSP system has some merits, under the right circumstance and for the right time in your life but it is not a blanket good program for everyone.
Our hope is that you will take the path that enables you to maximize the efficiency of your money, now and in the future.