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Linear Thinking Can Kill Retirement Dreams, says TD Waterhouse

5 minute read
By TD Bank Group
• Feb. 7, 2007
- Many Canadians too cautious about retirement saving: TD Waterhouse Investor Poll - 35% of respondents say they will think more about investing when they earn more or pay off debt - 26% say high expenses and debts as primary obstacles to saving for retirement - The antidote? Don't think you have to be debt-free before starting a retirement plan TORONTO, Feb. 7 /CNW/ - It's a familiar story. According to Statistics Canada's latest data, almost 86% of tax-filers were eligible to contribute to an RSP for the 2005 tax year, yet less than a third of this group made contributions. About 93% of the total contribution room available to Canadian tax-filers was left unused. These statistics square up with the findings of the TD Waterhouse Investor Poll, which probed the attitudes and behaviours of investors across the country. Specifically: - 35% of poll respondents say they will think more about investing when they start to earn more or pay off their debt. - 27% say it is more important to take care of their immediate needs than invest for their future. - 26% blame high expenses and debts as the primary obstacle to saving for retirement; 23% blame insufficient take home pay. - Only 32% of poll respondents contribute the maximum amount available to them. Not surprisingly, more investors this year (34%) believe they will have to work past retirement out of necessity than last year (28%). With Canadian household debt increasing, the question of whether to pay down debt or invest for the future is on more people's minds. According to Statistics Canada, Canadians had debts estimated at $760 billion in 2005, nearly 1.5 times higher than in 1999. Between 1999 and 2005, the median debt load for families rose 38% from $32,300 to $44,500. "Paying down debt is important, but many people pursue it single-mindedly to the detriment of other critical financial goals, such as saving for a secure retirement," says Patricia Lovett-Reid, Senior Vice President, TD Waterhouse Canada Inc. "This kind of linear thinking can be a dangerous trap for investors. In some cases, it may be better to take a balanced approach." Mr. Tortoise vs. Ms. Hare To illustrate how a more balanced approach to debt reduction and retirement savings can benefit the investor, TD Waterhouse looks at two fabled characters: Mr. Tortoise and Ms. Hare. Both are 30 years old, have identical incomes, mortgages and consumer loans of $12,000 at an interest rate of 12%. In fact, they are the same in every respect except for their attitudes towards debt and investments. Ms. Hare hates to be in debt. She has set a goal of paying off her loan in two years. Therefore her monthly payment will be $565.07 and her total borrowing cost will be $1,561.68. She won't contribute to her RSP until this goal is accomplished, and figures she will still have 33 years to save for retirement at age 65. At the end of the two-year term on her loan, she will begin monthly RSP contributions of $298.05, which she will continue until retirement at age 65. Mr. Tortoise has decided to put off being debt-free longer in order to start on his RSP immediately. He will take a five-year term on his loan. His monthly payment will be $267.02 and his total borrowing cost will be $4,021.20. Mr. Tortoise will invest $298.05 per month - the difference between his loan payment and Ms. Hare's - in his RSP until retirement at 65. He will have a two-year head-start on his monthly RSP contributions and will benefit from two additional years of tax benefits and refunds from his RSP contribution compared with Ms. Hare. Paying off her loan three years sooner than Mr. Tortoise saves Ms. Hare $2,459.52 in total borrowing costs, but what will be the size of her retirement nest-egg at age 65 compared to that of Mr. Tortoise? Assuming they both earn a steady 7% annually on their RSP portfolios for their entire investment period, Ms. Hare will have accumulated $425,377.29 in her RSP and Mr. Tortoise will have $494,418.02 - a difference of $69,040.73. "Ms. Hare may have $2,459.52 more in her pocket because of her aggressive loan repayment schedule, but she's clearly behind Mr. Tortoise at the finish line - just like in the fable," continues Lovett-Reid. "In the long run, it simply doesn't pay to put off contributing to your RSP." "Looking at the bigger picture, Canadians are living longer after retirement. By 2020, there will be only three working Canadians for every retiree, compared with today's ratio of five to one," concludes Lovett-Reid. "The risk of retirees outliving their retirement nest-eggs is substantial. Yet only 7% of the RSP contribution room available to eligible Canadian tax-filers was used in the 2005 tax year. This is a significant and growing issue for the well-being not only of the next generation of retirees, but for the future workforce who will have to support them in retirement." About TNS Canadian Facts TD Waterhouse's sixth consecutive annual poll was conducted by Toronto-based research firm TNS Canadian Facts. They conducted telephone interviews with 1000 randomly selected Canadians across Canada who hold investments products either inside or outside of a registered savings plan. The interviews were conducted between October 18 and November 2, 2006. Respondents were between the ages of 18 and 69. The total sample data is accurate to +/-3.1 percentage points, 19 times out of 20. About TD Bank Financial Group The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Financial Group. TD Bank Financial Group serves more than 14 million customers in four key businesses operating in a number of locations in key financial centres around the globe: Canadian Personal and Commercial Banking including TD Canada Trust; Wealth Management including TD Waterhouse and an investment in TD Ameritrade; Wholesale Banking, including TD Securities; and U.S. Personal and Commercial Banking through TD Banknorth. TD Bank Financial Group also ranks among the world's leading on-line financial services firms, with more than 4.5 million on-line customers. TD Bank Financial Group had CDN$392.9 billion in assets, as of October 31, 2006. The Toronto-Dominion Bank trades on the Toronto and New York Stock Exchanges under the symbol "TD". For further information: Stephen Ledgley, NATIONAL Public Relations, (416)848-1376, sledgley@national.ca; Lisa Hodgins, TD Bank Financial Group, (416) 983-2982, lisa.hodgins@td.com

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