The RRSP deadline is almost here again. Are you ready? RRSP pointers and tips from an expert
It’s almost RRSP time and, as usual, I’m not prepared. After the year I’ve had, there is definitely a lot of room left to invest but I don’t have the cash. I asked my friend Paul for some advice because I find myself in the same spot every year. Paul used to be my neighbour and we shared adjoining rooftop decks. Every time I saw Paul on the roof I would ask for financial advice. Paul finally got fed up and moved across the country to Vancouver to get away from my constant questions. He said it was for a job but I know better. So I hounded him one more time. Below is some great advice to help you get thinking about your own RRSP before the deadline!
RRSP Wisdom from Paul, CFA (Anthem Capital)
It's that time of year again where the banks bombard with us with commercials of happy smiling retirees and the news channels, preying on everyone's stress, try to look like heroes by making this annual exercise "simple" in their chart formats. If you have not met or do not know what to do before another RRSP deadline, don't panic. But do read on.
Personal investing and retirement planning are not the typical opening topics of conversation for most. If so, it is usually met with a lot of eye rolling. However, financial literacy is a necessity (and I strongly believe should be introduced very early in our education systems). It is never too early to begin. I've seen and read about too many people who find themselves in their 50s or 60s and finally start to pay the attention to their retirement that is required, although would have had a larger impact in their 20s and 30s.
I have worked in finance most of my professional career (predominantly in investment banking, Mergers and acquisitions and as an Equities Analyst covering gold producers). After watching a lot of fees being paid for lack of returns in my own accounts, I have "picked up a thing or two" related to personal investing. Combined with scores of stories from family members and friends about their investing experiences, I try to enlighten people to rely less on banks and brokers. Firing your advisor and managing everything overnight yourself would be a drastic measure; however, slowly, say over a year, build up a base of knowledge to better inform yourself, pay less fees to an institution, and understand how your nest egg is performing more frequently than once a year.
Here are some pointers and some of the more common questions raised:
1. RRSP vs. mutual funds, GICs and all those other things
First of all, let's distinguish some jargon between a Registered Retirement Savings Plan (RRSP) and mutual funds. A RRSP is nothing more than a plan, and you have to set it up either through a bank, an online trading account, or a financial advisor. Revenue Canada has allowed us to earmark a portion of what we earn every year (a contribution) and allocate that to our nest egg (the plan) we need in our retirement years. For this, Revenue Canada taxes us on a smaller portion of our annual income if we have made a contribution in that year. Setting up an RRSP is easy, to the point that many people have several accounts (a big no-no, see 5).
What you "put in" or "contribute" to an RRSP is what's important. Most will buy mutual funds because this is what the banks and large financial institutions push, and what is advertised most. A mutual fund is merely a pooled amount of dollars that you and others have contributed, and together a portfolio manager is hired who buys and sells a group of securities based on the fund’s style and objectives...and hopefully makes a return. The truth is there are thousands of mutual funds to choose from, with each financial institution claiming they have the best (I do not own any mutual funds and will discuss the reasons and options later). In other words, think of the RRSP as the toy box or a container and the investments as toys (what are really important).
2. At least "contribute" at the RRSP deadline versus a hasty "buy"
When it comes to that stressful RRSP time of year, DO NOT FEEL FORCED to purchase an investment (mutual fund, GIC, savings bonds, etc.). Instead, make the cash contribution and decide later what investment you will make. You will still receive the tax deduction for this. The banks and advisors will not tell you this action and are basically skipping a step when they "advise" you. Why? Because they make their fees off your mutual fund purchases and other such products. In other words, as long as you have put the cash into your RRSP, you do NOT need to buy a mutual fund, a GIC, savings bonds or anything at that time to receive the full tax deductions for the dollars contributed (in other words, you are still taxed less on your total annual income). The banks and financial advisors will tell you this is not a good idea because your money is "not working for you" when sitting in cash. However, stock markets typically are weaker through the summer (and have been the most volatile over the last couple of years). Mutual funds, like stock prices, fluctuate and if you have to purchase a mutual fund (or an ETF, discussed later), you want to buy when it is cheap(er). Also, making a better informed decision a mere matter of months have lapsed without the pressure of a deadline is likely going to help you rather than hurt you over the long term.
3. Reduce fees
Know the commission schedules of what your advisor is recommending. Understand that for every $100 you are giving a bank or an advisor, you know how much will be working for you. For example, by the time you purchase a mutual fund, understand how much of the $100 will be going directly to your account or the fund you purchased after the bank's, mutual fund's and/or broker's fees. They are masters of turning $100 into say $96 straight away.