Nine rules to protect your money during RRSP season
What you need to know to use your RRSP successfully.
RRSP season is firing on all cylinders. When it comes to money, there isn’t much that’s more important than retirement savings. Job one is to protect the money. Here are nine rules to help you do that.
1. Ignore the hype. Don’t let ads pitching mutual funds, ever more complex exchange-traded funds (ETFs), or other ‘come hither’ products sway you into investing your RRSP contributions hastily.
By all means, contribute and grab that tax deduction but take your time deciding what to do with the money. Remember, an RRSP itself is not an investment. You don’t buy RRSPs. These retirement plans are simply boxes. You put your cash in and then choose a range of products to invest your money. It’s perfectly okay to let the cash sit there while you decide what investments suit you best.
2. Don’t borrow. No matter how tempting, don’t borrow to invest in your RRSP. You may yearn for the tax deduction and feel guilty that you haven’t saved as much as you should have. But even in today’s low interest rate environment the risks of losing money with borrowed money outweigh any benefits. Instead, buckle down and set up a plan to contribute regularly.
3. Walk away. If you don’t understand an investment, regardless of who pitches it to you, walk away. There is a legion of people out there who wish they had done just that during various stock market bubbles over the past 20 years. Take your time, ask questions, do research and if you still don’t comprehend a specific investment take your money elsewhere.
4. Conservative wins. The stock market has hit new recovery highs, especially in the United States. That is tempting many to consider equities over low-returning bonds and cash-like investments such as GICs.
Don’t be fooled. Over 20- and 30-year time periods, a conservative portfolio with as much as 60 per cent in bonds and 20 per cent in cash has performed almost as well as one with 80 per cent in equities, with far less risk.
Only take chances with money you can afford to lose, not with funds that will support you in retirement.
5. Avoid seg funds. Segregated funds are sold by the insurance industry. Generally, they are clones of regular mutual funds but feature a return of capital guarantee at the cost of correspondingly higher management fees. A seg fund with a 100 per cent return of capital guarantee would have higher fees than one guaranteeing a 75 per cent return. You usually must hold the funds (and pay those high fees) for 10 years before the guarantee activates.
But keep this in mind; there has never been a 10-year period since 1950 when the total return (including dividends) of the broader market has lost money.
We came close between 1998 and 2008. But overall the guarantee isn’t worth anything unless you happen to be selling what you bought 10 years earlier just as the market hits a 2008-style low and you have a 100 per cent return of capital guarantee.
The industry will point out death benefit guarantees and other features. However, keeping fees low with standard mutual funds or ETFs is a better strategy for RRSPs.
6. Move your account. If your RRSP is at your bank, consider moving it to the bank’s brokerage arm. Bank-level investment accounts (with the exception of TD) limit you to the bank’s own mutual funds. This restriction means that better and cheaper investments, including low-fee products such as exchange-traded funds, are not available.
7. Invest your situation and temperament. Don’t follow market trends, instead pay attention to who and where you are. A single parent with a civil service pension may be able to afford less risk than a self-employed couple with no children.
Know yourself and your situation first. Invest second.
8. Sweat the small stuff. I’ve heard it a million times. “I’m going to contribute to my RRSP when I have more money.” No! Contribute now, even if it’s $25. Saving is a habit and once ingrained there’s a bit of magic to how protective we become of those squirrelled away sums.
9. Get started young. You may not have a taxable income but contribute anyway. Chances are that later in life, there will be times when it is hard to keep up those contributions, even though your income may be higher. It will be nice to know there is already a nest egg incubating. Also, the deduction can be carried forward to higher income years. Of course, if high interest debt is lurking, get rid of that first.
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