Our closets have a split personality. Some of the pieces are fun accessories that fit a current trend (think anything you bought for one season of wear at H&M) — we’ll pass these along when they’re just not us anymore. Others are classic investment pieces that we know will be with us for a long, long time (think Ralph Lauren). Sure, the trendy stuff keeps our wardrobe fresh, but we know our tried-and-true classics are what give our style staying power. And we feel the same way about our retirement plans. Here, the classic white collared shirt is your RRSP. And here’s why.
Tips to keep your RRSP on track
If you've been contributing to your Registered Retirement Savings Plan (RRSP), you know that it's perfect for long-term savings that keep growing, tax-deferred, until you retire. That's what it's there for.
From the time you contribute part of your first paycheque until the time you retire, your RRSP has a life span of about 40 years. But when individual stocks shoot up or drop down on a daily or hourly basis, it can be easy to lose your focus on the long term.
Here are a few tips to help you keep your RRSP on track:
Don't bother with trying to time the market. A successful RRSP strategy is based on choosing investments with staying power. Trying to time the market for short-term gains seldom pays off, even for professional investors.
Think about equities. Historically, the asset class with the best staying power is equities (i.e. stock). While equities may fluctuate substantially on a weekly, monthly or even yearly basis, equity investments generally provide the best long-term growth potential. With an investment horizon of 10, 20 or 30 years, your RRSP can comfortably ride out short-term fluctuations and enjoy superior returns.
Keep your risk tolerance in mind. The amount and types of equity investments you choose will depend on your goals and risk tolerance. An aggressive investor seeking high returns to retire early, for example, might weight equity funds more heavily as part of a diversified portfolio. A conservative investor, on the other hand, might be more comfortable with conservative blue-chip equity funds. While the potential growth is lower, so is the volatility.
Stick with it
In a crisis, it can be tempting to turn to your RRSP as an emergency cash source. But your RRSP doesn't make a good emergency fund and it can really cost you if you tap into your RRSP funds prematurely:
You'll pay tax off the top. RRSP withdrawals are subject to an immediate withholding tax. On a $12,000 withdrawal, for example, 20% would be withheld (26% in Quebec), leaving you with less than $10,000.
You'll miss out on future growth potential. With an average 6% return, $15,000 withdrawn from your RRSP at age 40 could have grown to $64,000 by the time you reach age 65. And every bit of growth contributes toward your overall retirement savings.
You can't put the money back. Unless you make the withdrawal under the Home Buyers' Plan or Lifelong Learning Plan, you can never repay amounts "borrowed" from your RRSP.
Instead of taking money from your RRSP in an emergency, consider other options such as selling non-registered holdings (watch out for capital gains tax implications, though) or borrowing.
Your winning strategy
Your retirement is too important to leave to chance. Coming up with an effective strategy on your own, however, may be difficult. To really fine-tune your RRSP strategy so that it fits your needs, get professional advice.
It comes back to wardrobe selection. The young saleswoman may tell you it looks great and is absolutely slimming, but wouldn't you feel more comfortable if she wasn't just shy of legal and had a "1" in front of those size 0 jeans? You need more classic advice...that carries a little weight.
