One of the most common New Year’s Resolutions is to “get in shape”. So every January, fitness centers and health clubs are packed with people committed to new regimes of exercise. This is an admirable goal, but like any goal without a specific and measurable objective, the chance of achieving success is low. Sure enough, as March approaches there is no more waiting for the stair-climbers and the spin class has plenty of free bicycles. All good intentions towards achieving a fitter body have been derailed for yet another year.
The same is true of RRSP “Season”. Every February, the big banks flood the airwaves with advertisements alerting Canadians to the benefits of investing in RRSP’s before the March 1st deadline. While the rewards of contributing to the previous year’s RRSP room are genuine, investing only during February’s 28 day period without a comprehensive approach to your overall financial plan is just like the New Year’s Fitness Resolution: lots of sweat for minimal reward.
Don’t get me wrong, any savings are good savings, and contributing something to your RRSP now will allow you to realize the tax benefits as well as increase the compounding effect of the funds. However, making regular RRSP contributions throughout the year instead of a one-time deposit will have a greater impact on the quality of your retirement, especially if you have unused contribution room still to use.
A second benefit to regular contributions comes through “Dollar-Cost Averaging”. This is the principle of saving and depositing regularly to average out the cost of your investment. When the unit price of a fund is low, your regular contribution buys more units. As a result, you typically receive a better average cost per unit than you would with a lump-sum investment.
Making monthly RRSP contributions also removes any emotional considerations from investing. This third benefit is less tangible than increased returns but just as significant. Trying to time your purchase to capitalize on current conditions can be exhausting and is no more assured of success than picking race horses. However, setting up an automatic withdrawal into your RRSP allows you, the investor, to disregard the ups and downs of the market.
Don’t wait until next February to take control of your financial future. Make a spring resolution to speak to a professional financial security advisor about starting regular RRSP contributions this month. Working together in the following process, they can help find the best retirement savings plan for you now and in the future:
Step 1: Identify your retirement goals, time horizon and risk tolerance.
Step 2: Through determining your cash flow, you can determine the amount of savings available for contribution.
Step 3: Identify the appropriate investment portfolio to achieve your goals.
Step 4: Set up a monthly contribution of the surplus to a registered retirement savings plan.
By choosing to use more of your RRSP contribution room monthly, you‘ll give your money more time to grow, and give yourself the best opportunity for long-term financial success and a comfortable retirement.