MoneySense Magazine, February 2011
Turbocharge your RRSP
Falling behind? It’s not too late to catch up. These seven tips will help put your RRSP into overdrive.
This article was first published in the February 2011 issue of MoneySense.
1: Get your boss to help out
The first thing to do to boost your savings is to have a good look around for any free money on offer. It’s amazing how many people will do almost anything for a raise, but when their employer offers to pour money into their RRSPs, they don’t even bother filling out a few forms.
If your company offers a defined benefit pension plan, join. If you can get into a group RRSP plan or defined contribution pension plan where your company matches part of your contributions, run—don’t walk—to HR to sign up. Why? Because if you don’t, you’re turning away free money that will help you reach your retirement goals faster.
Employee stock plans are another great way to get a big return on your investments, provided you don’t concentrate too much of your net worth in your company stock. (Otherwise you’ll be doubly vulnerable if the company runs into trouble.)
“It is shocking that very educated professionals do not take maximum advantage of these types of programs,” says financial educator Talbot Stevens. “I would put that at the top of the list for most people—even ahead of normal RRSPs. If you put a dollar in, and the employer will give you another dollar, that’s a tough return to beat.”
2: Make it automatic
Sure, You may have heard the expression “pay yourself first”—meaning that every time you get paid, you immediately put a portion of that money into your savings—but do you actually do it? “Often people invest on an ad hoc basis—when they have the cash and when they’re in the mood,” says Stevens. “Sadly, both conditions have to exist at the same time or nothing happens.”
Make 2011 the year that you actually set up an automatic savings plan to stash money in an investment account every time your get your paycheque. You won’t ever see the money and be tempted to spend it, and it will snowball every month. You’ll also benefit from “dollar-cost averaging”—meaning that you’ll buy more shares in mutual funds or index funds when they’re cheap (because your $500 automatic purchase, say, will cover more units), and fewer when they’re expensive. Once your money is invested, leave it there to grow. “It should be sacrosanct money,” says Tom Hamza of the Investor Education Fund.
If you feel like you’re barely making ends meet as it is, start small. Even taking $40 off each biweekly paycheque will add up to more than $1,000 a year, which is a good start. Besides, just setting your savings plan up is a great way to overcome that inertia. Once you reach your mid-50s, the kids move out and the mortgage is paid off, you’ll be able to drastically increase the amount. “Remember, you’ll be going into what will be the highest earning period of your life,” says Hamza. “Time is still on your side, but you need to take action now.”
If you have no idea whether you’re saving enough, it may be time to create a proper financial plan. (See “Three Magic Numbers” for help on coming up with some approximate savings goals in the meantime.) At first, you might be intimidated to realize you’ll need to save, say, $400,000 for retirement. But it won’t be so hard: consider that if you start saving $600 a month at age 40 and get a 6% return on your investments, you’ll hit your target by age 65. But be careful: people who feel pressure to get high returns often fall into the trap of choosing overly risky investments—a strategy that can have potentially disastrous results.
MoneySense Magazine, February 2011