|Monthly RRSP contributions beat lump-sum splurge
Tuesday March 06, 2012
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
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.
Generic Mutual Fund Disclaimer
Commissions, trailing commissions, management fees and expenses
all may be associated with mutual fund investments. Please read
the simplified prospectus before investing. Mutual funds are
not guaranteed and are not covered by the Canada Deposit Insurance
Corporation or by any other government deposit insurer. There
can be no assurances that the fund will be able to maintain
its net asset value per security at a constant amount or that
the full amount of your investment in the fund will be returned
to you. Fund values change frequently and past performance may
not be repeated.
Personal Opinions & Recommendations Disclaimer
The foregoing is for general information purposes only and
is the opinion of the writer. This information is not intended
to provide specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice. However,
please call the author to discuss your particular circumstances.