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Wait until your salary peaks and your debts clear before pouring cash flow into RRSPs. (Alexander Raths/Thinkstock)
Wait until your salary peaks and your debts clear before pouring cash flow into RRSPs. (Alexander Raths/Thinkstock)

Finance February

Invest in RRSPs early, but not before clearing debt Add to ...

If you don’t have a bulging RRSP by the time you’re 30, there’s no need to despair.

Experts agree that many Canadians are better served by directing their money to other needs, especially early in life.

So long as you tackle your obligations in sensible order, you should still have plenty of time to catch up and enjoy a comfortable retirement.

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Young adults should realize that it’s unrealistic to think that a typical wage earner can stash money into retirement savings while also paying off student debt and paying down a mortgage, says Kurt Rosentreter, a financial adviser with Manulife Securities Inc.

“People want to feel like they’re achieving all their goals at once, even if mathematically it’s the wrong answer,” he says.

A 25-year-old fresh into the work force, for instance, shouldn’t be routing a big chunk of her cash flow into RRSPs if she has tens of thousands of dollars in student loans, or worse, thousands in high-interest credit card debt. It makes no sense, Mr. Rosentreter says, to put money into a retirement account where it may grow 3 per cent when your debt is growing at rates of up to 18 per cent.

Of course, if your situation allows it, you should “start investing as soon as possible,” says Chris Buttigieg, Bank of Montreal’s senior manager of wealth planning strategy. The earlier you begin, the longer you have to benefit from the compounding growth of your investments over the course of your life.

But first, he says, “try to get that debt out of the way.” Once high-interest debt is under control, then young people can divert some of their cashflow to an RRSP. “Your savings rate should increase as your career progresses,” he says.

Malcolm Hamilton, a former partner with Mercer Human Resource Consulting Ltd., says the notion of starting to contribute young and saving forever isn’t realistic.

“Your priority should be getting major expenditures behind you,” says Mr. Hamilton, who recently became a senior fellow focusing on retirement savings at the C.D. Howe Institute.

For the typical Canadian family, that means focusing first on meeting the expenses that go with getting established in life. This includes student loans, weddings, having children and home ownership.

Most of those tasks will involve running up debt – and erasing that debt is just as important as building up your RRSP. “A dollar put against your debt is every bit as effective as a dollar saved for retirement,” he says.

Once your debts are gone, you can then divert your newly freed up cash flow into your RRSP, Mr. Hamilton says. This most often happens in your 40s, when your salary is likely to be at a peak. At this point, you should pour as much as possible into your RRSP to make up for previous years where you may have made small or no contributions.

Mr. Hamilton says the smartest strategy is to leave your retirement age variable until you accumulate a significant amount of savings and can assess what your income would be after you retire.

How you structure your RRSP should change with age, says BMO’s Mr. Buttigieg.

Younger people have the freedom to take on more exposure to the stock market, knowing that if they get burned, there will be time for the market to rebound.

But putting too much in equities later in life, when hundreds of thousands of dollars could be sitting in your account, makes your RRSP too susceptible to market volatility.

Unless you’re lucky enough to have extra retirement income, like work pension, he says you should take a “more conservative approach” to RRSP investments, leaning more heavily on fixed-income assets than equities.

Mr. Rosentreter agrees that investors should avoid being seduced by Bay Street. “Come into it with the attitude that you don’t need any stock market exposure, [and get] your money manager to build a case for why you need any,” the Manulife adviser says.

If you regularly revisit your RRSP holdings and monitor their performance, you’ll know whether they’re reaching the goals you have in mind and if you need to tweak the balance to make it work for you.

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