Planning for retirement is like piecing together a financial puzzle. One of the biggest questions you might face is whether to save or invest your money during RRSP season.
According to Vancity and Aviso Wealth advisor Josephine Machira, the answer depends on your goals, timelines, and comfort level with risk. Here’s how to make the decision that’s right for you.
Factors to consider when deciding to save or invest during retirement planning.
Saving and investing both have their time and place, so it’s important to decide which is right for you.
“Typically, saving involves setting money aside for short-term to medium-term goals, while investing is suitable for longer-term goals,” says Josephine. “It all starts with understanding your personal goals. What are you saving or investing for? A home, a car, or your retirement?”
Your time horizon is also crucial. “Before making a decision, consider when you need to access the funds. If it’s in the short term, you’ll want something liquid,” Josephine advises. “Savings accounts are ideal for easy access, but for long-term goals like retirement, investing can help your money work for you.”
Another key factor is your risk tolerance. “What will make you sleep at night?” Josephine asks. “Choosing the right vehicle — whether it’s a high-interest savings account, a diversified investment portfolio, or both — consider what will make you most comfortable that you won’t lose sleep over it.”
Want to make your retirement planning a little easier? Try the Vancity Retirement Calculator.
“Choosing the right vehicle — whether it’s a high-interest savings account, a diversified investment portfolio, or both — consider what will make you most comfortable that you won’t lose sleep over it.”
Common misconceptions about saving and investing.
To make the most of your financial strategy, it’s important to know what your money is actually doing and what your options are. Josephine points out a frequent misunderstanding about savings: “Some people think, ‘I’ve put money in a savings account, so it’s working for me,’ but that’s not necessarily true. Saving and investing are not the same.”
When it comes to investing, some people fear the risks. “It’s a common misconception that investing is always risky,” Josephine says. “The truth is, it depends on your strategy. Talking to an advisor and completing a risk assessment can help you understand what’s right for you.” Josephine reiterates that you have to do what you’re comfortable with, but speaking to a wealth advisor can help you make an informed decision.
“Some people think, ‘I’ve put money in a savings account, so it’s working for me,’ but that’s not necessarily true. Saving and investing are not the same.”
How to evaluate your risk tolerance during retirement planning.
If you’re unsure about how much risk you can handle, Josephine recommends starting with one simple question: “What will make you sleep at night?”
She emphasizes the importance of emergency savings as a buffer. “Think about what would happen if an unexpected expense came up, like a broken home appliance or a medical issue. Would you have the liquidity to cover it?”
Vancity also offers a risk assessment, which Josephine says is best done with a professional. “We’ll help you assess your financial situation and make sure you’re choosing the right strategy for your personal circumstances.”
RRSP advantages: Maximizing your contributions for retirement planning.
Contributing to your RRSP is one of the top moves you can make for retirement and something to consider when you’re using the retirement calculator. “Your notice of assessment from the CRA will tell you how much contribution room you have,” Josephine explains. Getting yourself into a lower tax bracket is one of the main RRSP advantages.
For example, if your income is $80,000 and your RRSP contribution room is $10,000, contributing the full amount could lower your taxable income to $70,000. “The CRA is encouraging Canadians to save for retirement by offering these tax benefits,” she says. Taking advantage of the resources available to you will help you build the lifestyle you want in retirement.
Timing matters, too. “The RRSP contribution deadline — usually the last day of February — is crucial. Contributions made by then can be applied to the previous tax year, so planning ahead with an advisor can make a big difference.”
Knowing your contribution room and the RRSP contribution deadline are two easy and effective ways to be informed.
“The RRSP contribution deadline — usually the last day of February — is crucial. Contributions made by then can be applied to the previous tax year, so planning ahead with an advisor can make a big difference.”
A real-life example: Avoiding tax surprises.
When it comes to your taxes, no one likes being surprised by a hefty bill. In the first 60 days of the year, when you’re considering contributing to an RRSP, it’s important to take a look at your T4 slips and your total income from other sources.
Josephine says, “Having a clear summary of all your income helps you make informed decisions about contributions.”
Josephine recalls helping a Vancity member who was surprised by a potentially higher tax bill than expected and how they rectified the situation. “I was working with a member who was on maternity leave the year before we met. One common challenge for parents on parental or maternity leave is that less tax is often deducted from their income during this period compared to when they are employed full-time. This can result in an unexpected tax bill.
Of course, when you’ve just had a newborn, the last thing you want is to dip into your savings to pay taxes — especially with all the new expenses that come with having a child. That’s why tax planning in these cases is so important. The first 60 days of the year provide an opportunity to assess your income, determine whether you might owe taxes or receive a refund, and make an RRSP contribution to reduce your taxable income.
In this member’s case, we discovered she did owe taxes. Fortunately, by making an RRSP contribution, she was able to reduce her taxable income and avoid owing additional taxes to the CRA. She was relieved we caught it in time and avoided that financial strain.”
Preparing for economic uncertainty.
In today’s economic climate, Josephine recommends one essential step: “Have a financial plan drawn for you. This allows you to understand your current situation and prepare for risks that may arise, impacting your lifestyle. Whether it’s a job loss, a growing family, or even potential lower investment returns, the impact on each individual is unique. A tailored plan is the best way to ensure you’ll be okay.”
Ready to take control of your financial future?
Whether you’re saving or investing, retirement planning is a journey, and Vancity is here to help. From risk assessments to personalized advice plans, we’re committed to helping you build a brighter future.
Book an appointment with a Vancity advisor.
Mutual funds other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes, and it is not intended to provide specific advice including, without, investment, financial, tax or similar matters. Using borrowed money to finance the purchase of securities involves greater risk than purchasing using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines. Please see our Terms of Use.