The Smartest RRSP Savings Strategy Of Them All

THINK OUTSIDE THE BOX: it’s never too late for “RSP Season” – start saving today!

This is deceptively simple. Start early with RRSP contributions and then make regular payments year after year. I do this, but I think I’m in the minority, judging by the persistence of a particularly dumb financial ritual called RRSP season.

You’ll notice RRSP season getting under way in January, with lots of advertising by banks, mutual fund companies and advice firms. It then runs through February to a deadline somewhere around March 1. That’s the last date for making an RRSP contribution that will count toward the previous tax year, and it’s always a busy one for banks and advisers. Often, you’ll see branches staying open to midnight to accommodate the worst procrastinators.

The financial industry is happy to beef up service for the RRSP deadline because it helps suck in dollars that generate revenue through fees and commissions. Why investors participate in RRSP season, I’ll never know. It’s not only more time-efficient to get on a regular, automatic RRSP savings program, but also more comfortable from a psychological point of view.

First off, let’s define an automatic RRSP savings plan. It involves you arranging to have money electronically transferred from your chequing account into your RRSP account every payday or every month. You could do it quarterly, too, but you’ll find the drain on your cash flow much easier to manage if you contribute lesser amounts more frequently.

The key to an automatic RRSP plan is that it’s nondiscretionary. No matter what financial diversions emerge, you’re building your retirement savings on a steady basis. Don’t just contribute the money to your RRSP and let it sit there in cash. Choose some quality mutual funds or ETFs to buy gradually. This is called dollar-cost averaging, which means you’ll be buying at both high and low points for the stock markets and your cost will be averaged out. Frankly, some studies have shown that plunking down a big chunk of change can get you a better return for your investment dollars, but psychologically, dollar-cost averaging is the better strategy for the most investors. First, it keeps people buying during bad times for the stock market. That’s when you’re supposed to buy, but most people don’t have the confidence.

Dollar-cost averaging also prevents you from jumping into an overheated market, when the upside is almost gone and downside risk looms. Instead, you chug along month by month and year by year, contributing without fail and building your retirement savings assets.

Set the amount of your contributions by figuring out how much you want to add annually to your RRSP and dividing by twelve or twenty-six. When arranging your automatic plan, don’t forget to keep your RRSP properly balanced. If you have a portfolio mix of 70 per cent stocks and 30 per cent bonds, break a $100 monthly contribution into $70 for an equity fund and $30 for a bond fund. Once a year, rebalance your holdings by selling your winners and buying your losers so you get back to a 70–30 mix

Posted by Rob Carrick on June 2, 2012 Copyright © 2012 Rob Carrick. All rights reserved

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