It’s February, and Registered Retirement Savings Plans (RRSPs) are top of mind. You have until March 1, 2013, to make a contribution and get the tax benefits for 2012.
But opening an RRSP is only half the battle. To truly take advantage of investing power to help you prepare for your retirement, try to avoid these top four RRSP pitfalls.
Pitfall #1: Not starting early enough
For Larry Moser, Regional Sales Manager, BMO Retail Investments, the best thing a person can do with respect to RRSPs is to start early.
“The longer your money has to invest in the market, the more money you’re likely going to have at the end of the day,” Moser says. “Investing even $100 every two weeks over the course of 25 or 35 years can leave you with a substantial sum of money.”
Moser encourages people to start saving for retirement as soon as they have their first job and to keep it up throughout their working years. He acknowledges that it can be hard at some points – if the financial landscape changes due to taking on a new mortgage, changing jobs or starting a family – but says that investors miss out on boosting their retirement savings every time they miss a contribution.
Pitfall #2: The last-minute dash
Contributing to your RRSP at the last minute is better than not contributing at all, but smaller, more frequent contributions are best, for a number of reasons.
First, by setting up a continuous savings plan with your financial institution and making RRSP contributions automatically – monthly or corresponding to your pay period – you’ll have peace of mind. You’ll know that you don’t have to scramble to make a contribution in February, after paying off your holiday bills, when money might be tight.
“Just the same way you pay your mortgage every two weeks and you don’t have to save for a once-a-year mortgage payment, you shouldn’t really put the pressure on yourself to save for a once-a-year RRSP contribution,” Moser says.
Second, by contributing 12 or 24 times throughout the year, you can take advantage of the technique known as dollar-cost averaging, which can reduce volatility and risk.
Pitfall #3: Limiting return on investment
Just transferring cash into your RRSP might not cut it, if you really want to build up your nest egg. Interest rates are low these days, often not even beating the rate of inflation. To see your savings grow, you’ll need to consider looking beyond Guaranteed Investment Certificates (GICs) and cash savings, aiming for a return of five or six per cent by diversifying your investments to include equities, according to Moser.
For those with fears that the market won’t perform as well as they’d like it to, Moser can only point to past performance.
“Nobody knows exactly what the market is going to do this year or next year but the fact is that over the long term equities have historically outperformed bonds,” he says. “And we believe that over the long term the best way to pay for retirement is to have a well-diversified portfolio that includes a substantial portion in equities so you can get the growth factor.”
Pitfall #4: Reinventing the wheel
The last major mistake people make with their RRSPs is too much tweaking, according to Moser.
“You never want to chase returns and you never want to chase the hottest stock,” Moser says. “You want to do what’s fundamentally sound.”
If your portfolio is well diversified and performing acceptably, he suggests simply adding to it as you continue to invest.
That’s not to say investors shouldn’t rebalance their portfolio periodically, as their personal situation or market conditions change.
“But there’s absolutely no need to reinvent the wheel every year,” Moser says.