It’s a common complaint - you’ve contributed to an RRSP for years, but the promise of a big pile of cash for retirement just doesn’t seem realistic, especially when that RRSP isn’t producing much in the way of a return. Maybe that’s why more than 60 percent of Canadians opted not to contribute to their retirement savings plans this year, according to the BMO Annual Post-RRSP Deadline Study.
It’s hard to fault investors for their ambivalence. The market’s ups and downs over the past few years have tested our nerve, while low interest rates have pushed our patience to the breaking point.
And yet, if you’ve been ganging up on your RRSP, it’s time to back off. Why? Because no matter how poor your returns, it’s not your RRSP’s fault – and it isn’t time to give up on investing in it for your future. So stop hating and start being proactive; consider following these steps instead...
1) Pin the blame
If you have money invested in RRSPs, there’s one imperative thing that you must understand: an RRSP is not an investment. Confused? You’re not alone; it’s a common misconception. In reality, an RRSP is little more than an earmark, and one that can be attached to just about any kind of investment, including stocks, bonds, mutual funds, GICs, options and even mortgages in some cases. As such, how your RRSP performs has about as much to do with the fact that it’s labelled an RRSP as your name has to do with your net worth (Rockefellers aside).
What does affect how your RRSP performs is what types of investments you’re holding within it. So if that old mutual fund you picked out years ago is no longer making your toes tingle, you can pin the blame there - and trade it in for a better investment. Plus, an RRSP’s deferred income tax and lack of capital gains tax mean that you get to keep more of what your investment produces over the years, giving your portfolio room to grow. (And did we mention that investing within an RRSP can also mean a tax refund!)
2) Set the record straight
According to Tom Bradley, president of Steadyhand Investment Funds, many clients who bemoan their sluggish portfolios are actually doing better than they think.
“People will come in and say they haven’t made anything in 10 years, but when we take a look, they’ve inevitably made something. Maybe it’s not as much as they could or should have made, but the problem is rather that people often don’t know how their investments have actually performed.”
So, while your portfolio may not be churning out double-digit returns, chances are you’ve overlooked some of its slow-and-steady progress. Before making any big decisions about your investments, sit down with your advisor to sort out how you’re really doing.
3) Adjust your expectations
Speaking of double-digit returns, if you got used to those in the ‘80s and ‘90s, times have changed. It’s time to say goodbye to this bygone era of can’t-lose investing, just like you bid farewell to your shoulder pads, leg warmers and teased bangs (please say you did).
“The TSX and bonds have averaged about 7 percent over the last 10 years, and a balanced portfolio should have returned about 5 percent over the last 10 years,” Bradley says. “We had such high expectations coming out of the ‘90s that these new averages now seem low, but 5 percent annualized over 10 years isn’t so bad.”
4) Devise a plan
Investing in an RRSP is a lot like planning a trip. You need to know where you’re going and what you plan to do when you get there. And just like you wouldn’t pack your parka for the beach, the amount of bulk you’ll need to add to your RRSP will depend on your age, goals and other sources of income. (Case in point: if you’re lucky to be sporting a lush pension, your RRSP need be little more than a feather in your retirement cap!)
Based on your situation, an advisor can help you to determine how much you need to save and what type of investments can help you reach your goals.
Furthermore, the percentage of your portfolio that’s made up of stocks will depend on your goals and your ability to keep your cool when your portfolio slips. You want to strike a balance that will have you earning solid returns...but sleeping well at night.
5) Build a low-fee portfolio
In order to get the most out of an RRSP, investors need a good mix of long-term assets. Exactly what you invest in will depend on your goals, your age and your risk tolerance. But the real key is to avoid spending money to make money.
“The reason many investors lag is that they’re paying too many fees and commissions,” Bradley says.
Choosing low-fee investments is even more important when investment returns are relatively low. After all, the lower your returns, the greater the impact a fee or commission will have on your bottom line.
Savings are better than no savings
If you never go out on a limb, you never get to the fruit. That’s as true in investing as it is in life. That isn’t to say that you need to load your portfolio with long-shot stocks in the hope of striking it rich; that’s reckless, not resourceful. On the other hand, if you’re only interested in investing in assets with guaranteed returns, such as GICs, you have to be willing to accept that those returns are going to be very low. As any smart investor knows, stocks jump and dive. And while that often makes even long-term investors uncomfortable, Bradley encourages us to embrace the ride.
“Yes, stocks are going to bounce around a lot, but now is as good a time as any to be investing in long-term stocks,” he says.
Consider this: Before the invention of structured retirement savings, people kept money under the mattress, in a coffee can or buried in the backyard. They didn’t get interest, but they still had cash to fall back on. And that’s still true today. Even in a worst-case scenario, your RRSP is a safe place to save your money – and save on taxes.
Yes, the market’s been sluggish in recent years, but it won’t stay that way forever. The more money you have waiting in the wings when things turn around, the better a position you’ll be in to capitalize on any market moves. Because ultimately, if you have money in the bank, you have power - the power to generate a return.
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Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.