RRSP? What the hell is RRSP?

When I came to Canada in my early 40s I had no thoughts, understanding or horizon on retirement.  As many others who found themselves in this country, no matter the reason, I was in survival mode. Like many, my English was poor, my life savings were enough to get me through no more than a few months and I had kids to take care of. But IT (Information Technology) was booming. It was just before Y2K (year 2000, for those of you outside North America, when the computers were going to crash if obsolete codes were not replaced by new ones). And East Europeans had a reputation of being good in coding. Well, OK, like everybody else, I had to answer the question “Do you have Canadian experience?”, as if it wasn’t obvious from my resume. Completely unprepared for such a stupid question, I simply laughed with contra-question “What’s wrong with my European experience?”. I passed, I guess.

Two years later I had a broken family, two teenagers to take care of and no help or support from anywhere. I still didn’t know anybody outside work – I had no friends in this country, and I had no time to try to make some. I had a few helpful colleagues.  (The only friend I had made on my first job went back to Europe shortly after). Yet I had a stable job in IT (or so I thought then) and my savings equivalent of a few months’ salary intact. I was lucky.

l had no idea of the retirement system in Canada. My knowledge was based on the old communist system when once you reach a certain age they gave you some monthly allowance called pension. No one understood or cared what does this mean or where it came from. It just was there. Like many other things. Also, there were no taxes. Or should I say, there were no visible taxes. The government took whatever the hell they wanted and gave us a minimal amount on which one could barely survive. Even to this day my friends in Bulgaria think there are no taxes on the pension amount they receive, since they only receive the after-tax amount.

I had no idea what RRSP (Registered Retirement Saving Plan) meant, nor did I have free mental resources to focus on something that looked so far away, when I had immediate needs to deal with. There were so many bills to pay, there was food to be put on the table, clothes for fast growing teens, you know it all.  I needed every hard-earned penny for it.

Later, much later I would learn that there was no government pension here. Well unless you had a government job and contributed to their pension plan. My small IT company had none.  Eh, there were some withdrawals for the so called CPP (Canada Pension Plan). Again, much later I’d learn that the CPP I’d receive would not even cover our utility bills. After all I hadn’t been in Canada for long enough.

I never understood the talks around RRSPs.  The company organised sessions targeted the younger workers. It was all about – start early, contribute a small amount and watch it grow with time. No one could answer my question – what if I start late? So, I dismissed it all. Not that I had much to contribute, not that I knew how, not that I understood even the terminology. I just realised that all these seminars and talks around RRSP were not meant for the people like me. The choices I had – sink or swim. Well, I actually had only one choice – swim. Who else would take care of my kids if I sank?

But I also did not know debt. I had eventually put my meagre savings into the so-called GIC (Guaranteed Investment Certificate – a fixed-term, fixed rate investment), which more or less covered inflation. Even this I had to learn. Who from ordinary people had savings during communism? Bank? What bank? What was a bank actually? We used to form big lines in front of the cashier’s office on pay day, make sure that our cash was exactly what it said in their book, then take it home and put it in a drawer. I’d split it into piles – one for food, another for utilities, some for clothes…. There was not much left, if any, after the second pile.

For my European friends, RRSP is a tax deferral system. This too I learned later, in my fifties. Many in Canada do not have any pension plan, aside from the meagre CPP. If one is in the unionised work forces, they are lucky to have had the opportunity to contribute to rich defined-benefit pension plans and later many have hefty pensions. But such jobs are hard to find. If one worked for a big corporation and was lucky enough that their corporation survived, they too may have good pensions. But even when they had contributed for many years, if the company went belly-up then too bad. Nortel or Sears Canada anyone? For the rest of us, moving from job to job in small companies that would last only a few years, for those who are self-employed, for many temporary and part-time workers, there is nothing but to rely on your own resourcefulness. And if you are lucky enough to be in a higher tax bracket, put some money aside through the RRSP mechanism.

I know this will sound way too complicated to my Bulgarian friends, but we are allowed to put some amount (up to a certain % of one’s earnings) into a RRSP. This amount is not taxed while staying in the RRSP, thus the tax deferral system. One pays tax on the year’s earnings minus the RRSP contribution, thus one pays less in current taxes. One invests the money and hopes to make enough to cover inflation and more. Eventually one starts drawing cash from their RRSP account in older age. Then they pay taxes on the withdrawn amount, which for most people will be at a lower tax bracket than one was in during their working years. Or should I say, RRSPs only make sense if you are in a higher tax bracket when working and know that you’ll be in a lower tax bracket in your retirement years, when you’ll need your RRSP savings.

That’s probably more information then anyone really wants. But it provides a foundation for the content of the next posts.