Another RRSP season is in the rear-view mirror, and by all accounts, it seems to have been a quiet one. About 10 to 15 years ago, we used to see long lineups at local banks during the last few days of RRSP season, but no longer. Planners and advisors were typically run off their feet in the last two weeks of February. But this doesn’t happen anymore. Why not? What has changed?
What has happened is that banks and independent advisors have been quite successful at persuading clients invest on a monthly basis rather than in one lump sum (often borrowed) at the end of February. In other words, we have become a victim of our own success more or less.
Monthly investing accomplishes a few things very well. It makes it far easier to invest by aligning your investments to your paycheques. It also ensures you pay an “average” price for investment assets like stocks or mutual funds. With a monthly contribution plan, you get the benefit "dollar cost averaging," which means your average unit cost over the year will be at neither the year’s high nor the year’s low, as it could be if you make your entire contribution in one lump sum. Instead, it’ll be somewhere in between. Moreover, you’ll get your money working and compounding for you on a tax-deferred basis much sooner, which over the long term can add thousands to your nest-egg.
Monthly contributions to your RRSP also reduce the need for an RRSP loan. An RRSP loan that takes more than a few months to pay off generally is not a good idea for the following reasons: First, as explained, your lump sum purchase at the end of February leaves you vulnerable to paying too high a price. Then, a longer-term loan always has you playing catch up – it’ll be more difficult to start a monthly plan, because your cash flow is being used to pay off last year’s RRSP loan.
In a way, it’s good news that the RRSP season is less important than it used to be, because this reflects that Canadians are getting the message about dollar cost averaging. One benefit of a huge RRSP run in February was the attention it drew from the media, which helped to educate consumers about the need to save for their retirement. A smoother, and thus quieter, RRSP season means less press, less advertising, and less attention all around, which makes it doubly important to ensure you have a plan in the first place.
So RRSP season may be done for another year, but your retirement planning should not be. When investing for retirement through an RRSP, it’s best to stay with your long-term plan, contributing regularly and making small adjustments as required due to changing economic fundamentals. But as always, consistency and discipline over the long term are the watchwords for success in achieving your retirement goals.
Bruce Loeppky is a financial advisor based in Surrey, B.C., and a regular contributor to the Fund Library. He can be reached at firstname.lastname@example.org.
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