RRSP tips

 Don't delay - start as early as you can

The earlier you start, the more you'll have when you retire.

The key to a large RRSP is growth. Growth through contributions and growth through investment earnings.

Rule of thumb: The longer your money is invested, the more it will grow.

Here's an example

With a $100 per month contribution, at 8% return per year. (Remember that this is just an example and that there is no guarantee of this return.)

Age started Total amount
contributed, to age 65		 Total value of RRSP at
age 65
25 $48,000 $322,108
35 $36,000 $140,855
45 $24,000 $56,900
55 $12,000 $18,012

$48,000 yields $322,000. That's the beauty of investing over a long time.

Another view

To get the same total, using the same 8% return per year assumption, see what your contribution needs to be if you start later.

To reach $322,000:

Starting age Every month you'd
need to contribute:
35 $230
45 $565
55 $1800

Let the power of time work for you. Invest what you can as early as you can. When you retire you will be happy you did.

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 Contribute effectively

Are you the type to scramble, looking for a few extra bucks to make an RRSP contribution at the end of February?

You know you should stop doing that. It's better than not contributing at all, but you're not getting the most out of your money.

Tips

  • Avoid the hype
    The stock market could be high. Or interest rates could be low. The truth is when you drop a lump sum into your RRSP in February you have no choice but to take what's given to you.
    Take a more controlled approach to your investing. Set up a plan and invest accordingly. It will be less stressful and will pay off in the long run.

  • Spread your investing over the entire year
    It's easier to invest in small doses. Set up your contribution to come directly from your bank account on the day you're paid. You'll be surprised at how quickly things add up - and you won't need to rush around for a large amount in February.
    Remember that your RRSP contribution is an investment in your future lifestyle. A few dollars now will go a long way later, once growth and time are factored in.
    Talk to your advisor today about setting up an Automatic Cheque Plan (ACP) to get you started.

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 Maximize your foreign market exposure

Canada is a large country but we only account for 3% of the world market. So it shouldn't surprise you when we say that Canada has a limited number of truly great opportunities available to investors.

There are more opportunities in markets around the world, which is why having foreign content in your RRSP portfolio is good for its bottom line. The government allows you to have up to 100% of your RRSP invested in foreign investments.

Diversification within the whole world market, rather than just within Canada, may decrease your level of risk and lets you participate in many countries' stock market successes.

Talk to your advisor to find out how you can maximize your international exposure.

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 You earned it - you should keep it

If you had to choose between paying the government or paying yourself most people would say it's a no-brainer. Pay yourself. That's what you're doing when you put money into a tax-deferred investment like an RRSP.

There are definite advantages to RRSPs.

They let you build your retirement savings faster.

  • If you decided to put $1000 of your earnings towards your retirement nest egg and you were in a 40% combined tax rate you'd really only have about $600 to invest. With an RRSP you can put all $1000 into the plan right away.

Your total income is reduced by the amount you invest in your RRSP.

  • By reducing your income you reduce the tax you have to pay, which leaves you with more of the money you earned.

Sounds good so far. But what about the tax part?

Eventually the government wants their share. With careful planning you could be in a lower tax bracket in retirement than during your working years. As a result, your income will be taxed at a lower percentage rate and you'll be able to keep more of your money.

Talk to an advisor today and find out how to put an RRSP to work for you.

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 RRSP loans - boosting this year's contribution

Borrowing money to invest in your RRSP can help you reduce your taxable income and could increase your tax refund.

It's an excellent way to grow your retirement nest egg if you haven't made regular contributions throughout the year. And applying your refund to the loan might reduce your payments and the cost of borrowing the money.

Another option is to take the refund and immediately invest it in your RRSP. This would give you a good head start on your contributions for next year. That, along with establishing an automatic investment plan, would eliminate the need for you to take another loan next year.

Remember that RRSP loans are a good idea but the best approach is to start an automatic investment plan and make regular contributions all year.

The choice is yours. Your advisor can help you decide what's best for you.

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 RRSP catch-up loans

When you're behind in your RRSP contributions, a good way to get back on track is to take out a 'catch-up' loan.

The best thing you can do for your retirement fund is contribute the maximum allowed by the government. Luckily, if you can't make the maximum, you can carry forward your unused contribution room indefinitely.

RRSP loan logic is simple. Top up your RRSP with money you borrow. Use the refund to pay down the loan and reduce the time it takes to pay it back. The invested money starts working immediately.

Remember that your situation is unique. Talk to your advisor about what's best for you.

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 Divide and conquer with laddering investments

Unless you have a crystal ball, you can't predict where interest rates are headed. Should you invest for the short term to gain flexibility or for the long term to get a better rate? By having your investments mature at different times, you can do both.

  • A 1-year Guaranteed Investment Certificate (GIC) offers a lower interest rate but you're not locked in for the long term.
  • A 5-year GIC offers a higher return but you lose the chance to reinvest if rates go up before it matures.

If you divide your investment into smaller pieces, you get the best of both worlds.

Let's say you had $10,000 to invest in January 1994.

Consider this:

If you had invested $10,000 in a series of 1-year GICs from January 1, 1994 through December 3, 2003, your investment would have grown to $14,408 with an average annual return of 3.72%.

If you invested the $10,000 in a single 5-year GIC and then reinvested the full amount at maturity in another 5-year term, your investment would have grown to $15,789 with an average return of 4.67%.

Now consider this:

If you had invested in five $2000 GICs with staggered 1-year, 2-year, 3-year, 4-year and 5-year terms, and you reinvested each in a new 5-year term when it matured, your investment would have grown to $16,555 with an average return of 5.17%.

A re-investment would occur every year, but the maturing money will always receive a 5-year rate!

With laddering investments, you take advantage of the higher interest rates offered through long-term investing yet keep the advantage of flexibility by having a GIC mature every year.

See your Sun Life Financial advisor today!

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 Using spousal RRSPs to your advantage

It's a well known fact that the government bases the tax tables on one very simple rule - the more you make, the more they take. But in certain circumstances you can reduce the amount of tax you will pay in retirement by contributing to a spousal RRSP now.

By splitting your contributions between your RRSP and your spouse's RRSP the plans will grow in tandem during your working years. Once you retire you and your spouse can take income from your respective retirement funds and be taxed at an individual level.

For example, if the two of you decided to enjoy a combined income of $50,000 from your retirement savings you would be able to stay at the lower tax rate applied to individuals earning $25,000 each.

There are no restrictions on how much you can contribute to the spousal RRSP as long as you don't surpass your own contribution limit. And your contributions don't affect your spouse's personal RRSP contribution limit in any way.

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 Consolidate your assets with one company

Many Canadians scatter their assets among numerous financial services companies. But it's not such a wise move.

Consolidating with one company has distinct advantages over the scattered approach.

Why?

  • You'll receive more effective advice - based on your full financial picture. More effective advice means an optimized portfolio and possibly lower fees.
  • It will be easier to understand how the advice affects your full financial plan and goals.
  • You will get better reporting about your investments through consolidated statements or a single view of it all on the Internet.

Find an advisor in your community today, they'll help you understand the benefits of working with one company for your investments.

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 Try one-decision investing with asset allocation

Asset allocation is a scientific method of investing that tailors your investments to your personality and characteristics.

There are basic truths that everyone knows about but few people actually listen to:

  • Market timing is practically impossible and does not work as a strategy over the long term.
  • Risk is real, so only take on as much as you're comfortable with.
  • Professional money managers know more than you do. That's why they're professionals

The idea behind asset allocation

  1. Figure out what kind of investor you are (there's a questionnaire!).
  2. Invest in a mix of assets (cash, guaranteed investment, equities, etc.) that is diversified and reflects the level of risk you are comfortable with.
  3. Leave all the day-to-day investment decisions to the pros.

If you think that making your life easier is for you, talk to your advisor about asset allocation.

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 Market volatility is not your enemy

The truth is, wise investors consider market volatility to be their friend.

A highly studied phenomenon called dollar-cost averaging takes advantage of market volatility and has been shown to reduce unit costs and produce higher long-term returns than lump sum investing.

Sounds too complex? How does this tie into your RRSP planning? How do you get set up with this dollar-cost averaging deal? It's easy.

Dollar-cost averaging 'just happens' when you set up automatic investments into a fund-based plan, where small investments are made regularly over the course of the year.

Your money buys more units when the markets are low. When markets rise again you'll get a much better return on that money. The whole portfolio may be worth more as a result.

And the more your RRSP portfolio is worth, the better your retirement lifestyle will be - just what you're looking for.

Talk to your advisor and find out how to put dollar-cost averaging to work for you.

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