Question. Hi, I guess it’s that time of year again because I keep hearing about RRSPs these days. I know it’s important, and I know I should contribute to mine. And I want to, but I just don’t have the cash available. I feel like I’m neglecting my RRSP and want to be more responsible, but it always seems to be so hard to come up with the money. How can I get on track? Do you have any advice or suggestions for me?
Answer. Great point, and you’re definitely not the only one who feels challenged to make RRSP contributions. Indeed, we have many competing demands on income, and RRSP contributions often get left behind.
This time of year, we typically get our annual dose of advertisements about saving for retirement. Saving for retirement is generally a positive message, but bombarding us about it just before the RRSP deadline sends the wrong message that now is the only time to contribute to your RRSP. In reality, it’s much better to contribute to your RRSP throughout the year as opposed to once a year.
Unfortunately for many of us, scrambling to come up with the funds required for a last-minute RRSP contribution is all too common. The good news is, changing your RRSP contribution strategy to a more balanced, year-round approach has both financial and psychological benefits.
More Time, More Money.
When it comes to making RRSP contributions, waiting until the last minute simply means forfeiting a year’s worth of tax-free growth. On the other hand, by making regular contributions throughout the year, you increase the amount of time for your savings to grow inside the RRSP.
If you think this is an insignificant difference, think again. Over a lifetime of investing, procrastination can cost you dearly. On the other hand, by contributing throughout the year, you can end up with thousands more at retirement. Really, it could mean the difference between cruising in a sailboat or paddling a canoe. Really, and not because you timed the market or picked superior investments, but simply because you contributed regularly throughout the year instead of waiting until the last minute.
Don’t Worry, Be Happy.
One of the best ways to commit to making regular RRSP contributions is to set up a monthly pre-authorized contribution plan. For example, let’s say you plan to make a $6,000 contribution to your RRSP this year. Instead of waiting until the last minute and scrambling to find the cash, you can simply setup a pre-authorized contribution of $500 per month, on whatever day of the month is most convenient for you. That’s it – set it, and forget it.
This practice of investing the same amount of money at regular intervals is known as “dollar cost averaging,” and helps takes the guesswork out of investing. Furthermore, because the dollar amount is fixed, you end up buying more when prices are low, and less when prices are high. Exactly what you’re supposed to do, and without even trying. This is a very strategic way to invest because it results in a lower adjusted cost base (ACB), which subsequently results in a higher rate of return.
Perhaps most importantly, committing to a systematic RRSP contribution plan takes the stress out of searching for last minute contributions, and reinforces the discipline of regular investing.
When RRSP contributions are left to the last minute, there’s little opportunity to develop a meaningful plan. Planning in advance, and making a habit of regular savings, can help ensure you meet your savings goals.
Although most of us recognize the importance of sticking to a regular investment plan, it’s easy to become overwhelmed by daily expenses. How much can you realistically save each month? A basic budgeting exercise should provide you with an accurate figure for developing your plan.