With the deadline for 2012 contributions to Registered Retirement Savings Plans (RRSPs) only days away, many people are scrambling to find money for their annual contribution and contribute it to their plan by March 1.
Once that’s taken care of, a lot of those last-minute contributors will sit back, breathe a sigh of relief and wait for the 2013 deadline to roll around in another 12 months. But they’d be better off, says Toronto-based BMO Financial Planner Jason Casagrande, to start planning next year’s contribution right now.
“After you make that lump-sum payment for last year, why not set up an automatic savings plan?” Casagrande says. “It will make your 2013 contribution a lot easier, that’s for sure.”
Most financial planners, Casagrande included, agree that Continuous Savings Plans (CSPs) are the most effective way to make regular and reliable contributions to a retirement fund. But some clients might be discouraged by how much they need to contribute every month in order meet their retirement goals.
Casagrande has a fix for that.
“If you determine you should save $400 a month but can’t quite commit to that right away, you can start with a smaller amount, like $150 a month and increase it every quarter,” Casagrande says. “That way, the client acclimatizes to the change in their cash flow without any big adjustment.”
Ramping it up
Investors could arrange to have their RRSP contributions coincide with payday. That way, they won’t even see the funds in their account and be tempted to spend them elsewhere before they’re put to work in an RRSP.
Casagrande also encourages people to share their savings goals with a spouse, friend or financial advisor, whether it’s just $25 a week or a more substantial 10 per cent of their gross income.
“Once you verbalize it, you’re more likely to stick to it,” he says.
For an even higher level of commitment, Casagrande suggests arranging with your workplace or the Canada Revenue Agency to reduce the amount of taxes you pay at source. That means you might be less likely to get a tax refund in May, but you’ll keep more income throughout the year, which can be invested into your RRSP at regular intervals.
Finding extra money
Another place to “find” extra money for next year’s RRSP contribution is in your paycheque, toward the second half of the year. Many workers see their paycheque increase some time after July, when they’ve made all of their Canadian Pension Plan (CPP) contributions for the year. When you notice that bump in pay, direct it toward your RRSP for the last few months of the year and you’ll see a noticeable increase in your annual contribution.
Similarly, any bonus pay or a salary increase – even if it’s just three or four per cent – is usually better off invested in an RRSP than spent on consumer goods or other things that aren’t going to give you a return on your investment.
One truly “free” source of money is an employer contribution to a group RRSP, which select workplaces offer their employees.
“This is a great savings strategy, since the employee funds a portion of their RRSP and the employer may match it,” Casagrande says. “Employees get extra long-term savings and no impact on their personal cash flow. If this kind of plan is offered through work, I encourage clients to participate.”
Get creative, with a professional
If you’d like to avoid making a last-minute contribution to your RRSP next year, or you’d like to increase the amount you contribute, having a frank and honest discussion with a professional is a great way to get started.
“Open up to your financial professional,” Casagrande says. “They can help set up a plan to help you succeed.”