Investment Growth Benchmarks

Ever wondered how to predict how much your RRSP might be worth down the road? You'll need to make some educated guesses about growth rates.

We all know the disclaimer: "past performance doesn't guarantee future results." True enough. But long-term historical averages and professional projections aren't just wild guesses—they give us stable reference points for setting reasonable expectations.

Organizations like FP Canada publish annual Projection Assumption Guidelines (PAG) specifically designed for long-term financial planning (10+ years). These guidelines aren't pulled from thin air.

They're built on a rich blend of data sources: actuarial reports from the CPP and QPP, surveys of Canadian investment firms, historical market performance (with a 25% weight given to 50-year historical real returns for equity assets), and market-based expectations like bond yields and equity earnings yields.

So what does FP Canada's 2024 PAG actually suggest for nominal (before inflation and fees) long-term average annual returns?

● Canadian Domestic Equities: 6.4%
● Foreign Developed Market Equities: 6.5%
● Foreign Emerging Market Equities: 8.3%
● Fixed Income (Bonds): 3.4%
● Short-Term Investments (Cash/T-Bills): 2.4%

Using these component projections, FP Canada estimates that a balanced portfolio (about 50% stocks, 45% fixed income, and 5% short-term investments) would yield a nominal annual return of around 5.0% before fees.

How does this stack up against real-world performance? Historical data gives us some context.

For 2010-2018, TD Economics analysis showed average annual returns of 5.8% for balanced portfolios and 7.1% for growth-oriented portfolios. More recent periods (2020-2023) saw lower returns—just 2.1% for balanced and 5.3% for growth portfolios—reflecting increased market volatility and rising interest rates.

Looking at longer timeframes, the S&P/TSX Composite Total Return Index averaged 8.6% annually over 10 years and 8.1% over 20 years (ending December 31, 2024). Meanwhile, the S&P 500 Total Return Index (in Canadian dollars) averaged an impressive 15.6% over 10 years and 11.3% over 20 years.

Notice the gap between recent strong performance (particularly in markets like the S&P 500) and the more moderate long-term projections from organizations like FP Canada? This suggests forecasters expect future returns may moderate from the high levels seen in the past decade or two.

Why? Current valuation levels and changing economic conditions play a role. Relying solely on recent high historical returns for your long-term projections could lead to overly optimistic scenarios.

Your investment choices significantly influence potential returns. The difference between projected returns for balanced portfolios (around 5-6%) and growth portfolios (which hold more equities and might align closer to the 6.4%-8.3% equity projections) highlights this relationship. A higher allocation to equities generally corresponds with higher potential long-term returns, but also comes with higher volatility.

Don't forget about inflation! The FP Canada 2024 PAG assumes a long-term inflation rate of 2.1%. Applying this to the nominal 5.0% projected return for a balanced portfolio suggests a real (after inflation) return of approximately 2.9% before fees. For your purchasing power to increase over time, your investment growth must outpace inflation.

Projected Long-Term Average Annual Investment Returns (Nominal, Before Fees)

Note: Ranges reflect guidance from cited sources. Balanced and Growth portfolio returns are derived from underlying asset class projections and typical allocations.

Understanding Investment Costs: Management Expense Ratios (MERs)

Those investment returns we just discussed? They don't tell the whole story.

Investment management fees and operating expenses directly reduce the net returns earned within your RRSP. The Management Expense Ratio (MER) is your go-to measure for understanding the true cost of owning a mutual fund or ETF.

What exactly is an MER? It's the total annual cost expressed as a percentage of the fund's average assets. This ratio includes the management fee paid to the fund company for portfolio management and administration, operating expenses (legal, audit, record-keeping costs), and applicable sales taxes (GST/HST). The MER is deducted from the fund's assets before performance returns are calculated and reported.

Here's where it gets interesting: for many traditional mutual funds sold through advisors, the MER also includes trailing commissions (trailer fees). These are ongoing payments made by the fund company to your advisor's firm for providing service and advice to you.

These trailer fees aren't small change—they can constitute around 40% of the MER in some cases. However, as of June 1, 2022, trailing commissions were banned for order-execution-only dealers (self-directed or discount brokerages) in Canada.

Did you know mutual funds come in different "series"? For instance, "Series F" funds typically have lower MERs because they don't include embedded advisor compensation. Instead, you pay your advisor directly through a fee-based arrangement.

Typical MER Ranges

Mutual Funds

MERs for Canadian mutual funds vary widely depending on the asset class and management style (active vs. passive). They can range from less than 1% for some money market funds to over 3% for certain equity or specialized funds.

Based on data compiled by Finiki.org (as of January 2024), typical median MERs were:

• Money Market: 1.00%
• Fixed Income: 1.50%
• Balanced: 1.95%
• Equity: 2.00%

Average asset-weighted MERs were slightly lower for some categories:

• Money Market: 0.89%
• Fixed Income: 1.38%
• Balanced: 1.82%
• Equity: 1.91%

Broader industry studies show a gradual decline in average mutual fund MERs. An IFIC report noted a Canada-wide average MER of 1.80% in 2018, down from 2.02% in 2006. A CSA analysis indicated the average MER for long-term mutual funds decreased from 1.83% in 2013 to 1.67% by 2020.

Despite this decline, Canadian mutual fund fees have historically been among the highest globally.

Exchange-Traded Funds (ETFs):

ETFs, particularly those designed to track broad market indexes passively, generally have significantly lower MERs than actively managed mutual funds.

Many broad-market Canadian equity, bond, and asset allocation ETFs offered by major providers have MERs well below 0.25%. For example, core Canadian bond ETFs can have MERs around 0.10%, broad Canadian equity index ETFs around 0.05%-0.06%, S&P 500 index ETFs around 0.09%, and all-in-one asset allocation ETFs around 0.20%-0.25%. Even actively managed or specialized ETFs tend to have lower MERs than comparable mutual funds.

The substantial difference in typical costs between traditional mutual funds and passive ETFs can have a profound impact on your long-term RRSP accumulation. Think about it: a difference of 1.0% to 1.5% or more in annual fees, compounded over several decades, can significantly reduce the final value of your retirement savings.

This underscores why you should consider investment costs alongside potential returns when making investment decisions. The increasing availability and adoption of low-cost ETFs reflect a growing awareness of fee impact among investors and increased competition within the industry.

Typical Annual Management Expense Ratio (MER) Ranges in Canada

Note: These are general ranges based on available data; specific fund MERs may vary. Mutual fund ranges primarily reflect traditional advisor-sold series (e.g., Series A); Series F or DIY funds would typically have lower MERs.

Setting Retirement Income Goals: Income Replacement Ratios

How much money will you actually need in retirement? It's one of the most common questions in financial planning—and for good reason.

pie title 
    "Up to $39,999 (85%)" : 85
    "$40,000 - $59,999 (80%)" : 80
    "$60,000 - $79,999 (70%)" : 70
    "$80,000 - $99,999 (65%)" : 65
    "$100,000 and above (60%)" : 60

A key step in retirement planning is determining the amount of income you'll need after leaving the workforce. The most common benchmark used for this purpose is the income replacement ratio, which represents the percentage of your pre-retirement annual income required to maintain a comparable standard of living during retirement.

Historically, financial planning guidance often suggested aiming for 50% to 70% of your pre-retirement income. This range was based on the assumption that certain expenses decrease or disappear in retirement—things like mortgage payments, work-related costs (commuting, clothing), childcare expenses, and saving contributions (like RRSP deposits themselves).

But is the 50-70% range still adequate? That's increasingly debated.

Several factors might push your needed income higher: longer life expectancies, rising healthcare costs (particularly for long-term care or supplementary health services not fully covered by provincial plans), a desire for increased travel or leisure activities in retirement, or ongoing financial support for dependents.

Some retirees find they need closer to 100% or even more of their pre-retirement income to meet their goals and cover potential contingencies.

More recent analyses suggest that the appropriate target replacement ratio varies significantly based on pre-retirement income levels. Does that surprise you?

Lower-income households typically need to replace a higher percentage of their income, as a larger portion is dedicated to non-discretionary expenses (housing, food, utilities). Higher-income households may require a lower replacement percentage due to progressive tax rates (meaning a smaller portion of their gross income was available for spending after tax) and potentially higher pre-retirement savings rates.

Reflecting this, a tiered approach based on an economic study conducted for the federal government provides more nuanced targets. The platform my65plus.ca, referencing this study with slight upward adjustments for conservatism and healthcare costs, uses the following default income-dependent target replacement ratios:

● Income up to $39,999: 85%
● Income $40,000 - $59,999: 80%
● Income $60,000 - $79,999: 70%
● Income $80,000 - $99,999: 65%
● Income $100,000 and above: 60%

Canada's retirement income system includes government benefits like Old Age Security (OAS), the Guaranteed Income Supplement (GIS) for low-income seniors, and the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP).

While these programs provide a foundational level of income, their maximum payout levels (combined average around $24,400 and maximum around $27,550 in 2024, assuming retirement at 65 with no other income) are generally insufficient on their own to meet the replacement targets for most Canadians.

The CPP enhancement aims to increase the portion of income replaced by CPP from 25% to 33.33% for those who contribute fully under the enhanced system, but substantial personal savings (like RRSPs, TFSAs, and workplace pensions) remain essential to bridge the gap.

Ultimately, suggested replacement ratios serve as a starting point. You should consider your unique circumstances, including health status, debt levels, desired retirement lifestyle, and potential unforeseen costs, when setting your personal retirement income goals.

Suggested Retirement Income Replacement Targets (as % of Pre-Retirement Income)

Note: These are guidelines; individual circumstances may warrant different targets.

RRSP Contribution Framework

How much can you actually put into your RRSP each year? The answer involves a bit of math and a few important rules set by the Canada Revenue Agency (CRA).

Calculating RRSP Contribution Room

Your maximum RRSP deduction limit for a given year is determined by a specific calculation:

1. Start with: Unused RRSP deduction room from the end of the previous year.
2. Add: The lesser of:
   • 18% of your "earned income" from the previous calendar year. Earned income generally includes employment and self-employment income, but not investment income or certain government benefits.
   • The maximum annual RRSP dollar limit for the current contribution year.
3. Subtract: The Pension Adjustment (PA) reported on your T4 or T4A slips from the previous year. The PA reflects the value of benefits accrued in an employer-sponsored Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP) during that previous year.
4. Adjust for: Other factors like Past Service Pension Adjustments (PSPAs) and Pension Adjustment Reversals (PARs), if applicable.

Confused by all this? Don't worry—the CRA calculates this limit for you and reports it on your annual Notice of Assessment (NOA) after you file your tax return. This NOA figure is the most accurate reflection of your available contribution room.

The maximum dollar limit is indexed annually. Recent and upcoming limits are:

RRSP Annual Dollar Contribution Limits

Key Contribution Rules

Unused Room Carry-Forward: If you don't contribute the maximum amount allowed in a year, the unused portion is carried forward indefinitely and added to your contribution room in future years. This gives you flexibility if your income fluctuates or your budget is tight some years.

Contribution Deadline: Contributions made within the first 60 days of a calendar year (e.g., January 1 to March 1, 2, or 3) can be deducted against either the previous year's income or the current year's income. The deadline to make contributions deductible for the 2024 tax year is March 3, 2025.

Age Limit: Contributions can be made to your own RRSP until December 31 of the year you turn 71. Contributions can be made to a spousal RRSP until December 31 of the year your spouse turns 71.

Over-Contributions: The CRA permits a cumulative lifetime over-contribution of up to $2,000 without penalty. However, amounts exceeding this $2,000 buffer are subject to a penalty tax of 1% per month for each month the excess remains in the account. This tax is calculated and paid using Form T1-OVP.

Tax Deduction for Contributions: A primary benefit of RRSP contributions is their tax deductibility. Contributions made to your own RRSP or a spousal RRSP can be claimed as a deduction on line 20800 of your income tax return.

This deduction reduces your net income subject to tax on a dollar-for-dollar basis. For example, contributing $10,000 reduces your taxable income by $10,000, leading to tax savings based on your marginal tax rate.

Here's something many people don't realize: you're not required to deduct contributions in the same year they're made. Contributions can be reported on Schedule 7 and the deduction carried forward to be claimed in a future year.

This flexibility allows for strategic tax planning, potentially saving the deduction for a year when you expect to be in a higher tax bracket, thereby maximizing the tax savings.

Certain payments related to RRSPs, such as administration fees for the plan or brokerage fees for transactions within the RRSP, are not tax-deductible. Interest paid on money borrowed to make an RRSP contribution is also not deductible.

The interaction between previous year's income, the current year's dollar limit, and the previous year's Pension Adjustment creates a lag effect. Changes in income or pension participation impact the following year's contribution room.

Therefore, if you have variable income or participate in workplace pension plans, you should rely on your CRA Notice of Assessment for the definitive contribution limit for the current year. The PA significantly reduces RRSP room for members of employer pension plans, reflecting the tax assistance already received through the pension.

RRSP Growth and Retirement Withdrawals

Registered Retirement Savings Plans offer two primary tax advantages: the deduction for contributions (which we just covered) and the tax-deferred growth of investments held within the plan.

Understanding how growth is treated and how withdrawals are taxed is essential for long-term planning.

Tax-Deferred Growth: Investment earnings generated within an RRSP—including interest, dividends, and capital gains—are generally not taxed as long as they remain inside the plan. This tax sheltering allows your investments and their returns to compound over time without the drag of annual taxation that would typically apply to investments held in non-registered accounts.

Think of it as a tax vacation for your money while it grows. The tax liability is deferred until funds are withdrawn from the plan.

Taxation of Withdrawals: When funds are withdrawn from an RRSP, the amount withdrawn is included in your taxable income for the year the withdrawal occurs. This applies to lump-sum withdrawals or periodic payments, typically received during retirement after converting the RRSP to a Registered Retirement Income Fund (RRIF) or purchasing an annuity.

Financial institutions are required by the CRA to withhold a portion of RRSP withdrawals (excluding qualifying HBP/LLP withdrawals and minimum RRIF payments) as a prepayment of income tax. The withholding tax rates for residents of Canada (excluding Quebec) are based on the total amount withdrawn at that time:

RRSP Withdrawal Withholding Tax Rates (Residents of Canada, excluding Quebec)

Source: Canada Revenue Agency

For residents of Quebec, different withholding rates apply, combining federal and provincial taxes. For non-residents of Canada, the standard withholding rate is 25%, unless reduced by a tax treaty.

It's crucial to understand that the withheld tax is an installment towards the final tax liability. The actual amount of tax owed on the withdrawal depends on your total income from all sources in that year and your corresponding marginal tax rate.

If your marginal tax rate is higher than the withholding rate applied, you'll owe additional tax when you file your income tax return. For example, withdrawing $20,000 results in 30% ($6,000) being withheld. However, if this withdrawal pushes your total income into a higher tax bracket (e.g., 40%), you'll owe additional tax on the $20,000 when filing your return.

Another critical aspect of RRSP withdrawals is the permanent loss of contribution room. Unlike Tax-Free Savings Accounts (TFSAs), where withdrawn amounts are added back to the contribution room in the following year, RRSP withdrawals (outside the specific HBP/LLP repayment structures) permanently eliminate the contribution room associated with the original deposit.

This makes non-essential pre-retirement withdrawals particularly disadvantageous from a long-term savings perspective.

The fundamental strategy behind RRSPs involves contributing during higher-income earning years when the tax deduction is more valuable (offsetting income taxed at a higher marginal rate) and withdrawing the funds during lower-income retirement years when the income inclusion will be taxed at a lower marginal rate.

The tax deferral allows for potentially greater compounding growth, and the tax rate differential between contribution and withdrawal generates the primary tax savings.

Special Pre-Retirement RRSP Withdrawals: HBP and LLP

What if you could access your RRSP funds before retirement without the tax hit? In certain scenarios, you can.

While RRSPs are primarily intended for retirement savings, the Canadian government allows for tax-free temporary withdrawals under specific conditions through the Home Buyers' Plan (HBP) and the Lifelong Learning Plan (LLP).

These programs essentially provide interest-free loans from your own RRSP savings, provided you follow the strict rules.

Home Buyers' Plan (HBP)

Purpose: Allows eligible individuals to withdraw funds from their RRSPs to buy or build a qualifying first home for themselves or a related person with a disability.

Eligibility: Key conditions include being considered a first-time home buyer (generally, not owning a principal residence in the preceding four calendar years, with exceptions for relationship breakdowns or disability), having a written agreement for the home purchase/construction, intending to occupy it as a principal residence within one year, and being a Canadian resident.

Funds must generally have been in the RRSP for at least 90 days prior to withdrawal for the original contribution to be deductible.

Withdrawal Limit: Up to $60,000 per person can be withdrawn. This limit was increased from $35,000 for withdrawals made after April 16, 2024. A couple meeting the criteria could potentially withdraw up to $120,000 combined from their respective RRSPs. Withdrawals must occur within the same calendar year (plus January of the following year).

Taxation: HBP withdrawals are not subject to immediate income tax, and the financial institution does not withhold tax on eligible amounts.

Repayment: The withdrawn amount must be repaid to an RRSP over a maximum period of 15 years. Repayments begin in the second calendar year following the year of withdrawal. The minimum annual repayment is generally 1/15th of the total amount withdrawn.

Repayments are made by contributing to an RRSP and designating the contribution (or a portion of it) as an HBP repayment on Schedule 7 of the tax return.

Consequences of Non-Repayment: If the minimum required repayment for a year is not made or designated, that amount must be included as taxable income on your tax return for that year.

Lifelong Learning Plan (LLP)

Purpose: Allows individuals to withdraw funds from their RRSPs to finance full-time training or education for themselves or their spouse or common-law partner.

Eligibility: The designated student must be enrolled (or have received a formal offer to enroll) on a full-time basis in a qualifying educational program at a designated educational institution (part-time enrollment may qualify under certain disability conditions).

Similar to the HBP, funds should generally be in the RRSP for 90 days before withdrawal for the contribution to be deductible.

Withdrawal Limits: Up to $10,000 may be withdrawn per calendar year. The maximum total withdrawal amount per participation period (until the balance is repaid) is $20,000. Withdrawals can be made up to January of the fourth year after the first withdrawal, provided conditions are still met.

Taxation: LLP withdrawals up to the annual and total limits are not subject to immediate income tax, and no tax is withheld. Amounts withdrawn exceeding the $10,000 annual limit or the $20,000 total limit are included in taxable income for the year the limit is exceeded.

Repayment: The withdrawn amount must generally be repaid to an RRSP over a maximum period of 10 years. The repayment period typically starts between the second and fifth year after the first withdrawal, depending on how long the individual remains a qualifying student. The minimum annual repayment is 1/10th of the total amount withdrawn. Repayments are designated on Schedule 7 of the tax return.

Consequences of Non-Repayment: If the minimum required repayment for a year is not made or designated, that amount must be included as taxable income for that year.

While these plans offer valuable access to RRSP funds without immediate tax consequences, there is an inherent opportunity cost: the funds withdrawn are not compounding tax-deferred within the RRSP during the repayment period.

Furthermore, strict adherence to the eligibility conditions and repayment schedules is essential. Failure to meet conditions (e.g., not completing the home purchase after an HBP withdrawal) or failure to make minimum repayments can result in the withdrawn amounts being added back to taxable income, negating the intended tax benefit.

The 90-day rule for contributions prior to withdrawal prevents using these plans simply to gain an immediate tax deduction on funds not genuinely intended for long-term savings.

Comparison of RRSP Home Buyers' Plan (HBP) and Lifelong Learning Plan (LLP)

Conclusion

Your RRSP success depends on four critical factors working together:

Contribution capacity sets your foundation—determined by income limits and pension adjustments.

Investment choices drive your growth potential, but fees quietly erode returns. That 1-2% MER difference? It could cost you tens of thousands over decades.

Income replacement needs guide your target. Do you need 60% of your pre-retirement income or 85%? Your lifestyle and income bracket hold the answer.

Tax strategy ties it all together. Contribute during high-income years, withdraw during lower-income retirement, and you'll maximize the RRSP's tax advantage.

Master these elements, and you'll transform your RRSP from a simple savings account into a powerful retirement engine.