linafeng

Top 10 dos and don'ts in RRSP investing

1.
DON'T - Procrastinate: It's not going to happen by itself. You need to make a plan, take action and be decisive. It's your life in retirement.

2.
DO - Take advantage of the power of tax-free compounding: Contribute as much as possible early in life, even if it means postponing the purchase of a house. A common regret among those now approaching retirement is that they didn't put enough money into an RRSP early on. A person starting annual contributions of $5,000 at age 25 would have $998,176 at age 65, but only $204,977 if the contributions started half-way there at age 45 (assuming a compound return of 7 per cent annually).


3.
DON'T - Take funds out of your RRSP: Not only will the withdrawal be fully taxed as income, you will miss out on tax-free compounding. In the meantime, you will be giving up valuable RRSP contribution room. With interest rates low, it may make more sense to borrow the money you need, including for buying a house or for education.


4.
DO - Achieve the highest possible longer-run return: The person contributing $5,000 a year from age 25 would have an extra $296,567 in his or her RRSP at age 65 if the average annual return in the portfolio is 8 per cent instead of 7 per cent.


5.
DON'T - Pay fees unnecessarily: This means you have to find out about the fees you are paying and judge if they are worth it. Many investment advisors count on you not thinking about it. A good example is a bond fund holding government bonds and charging a management expense ratio (MER) of around 2 per cent a year thus chewing up half or more of the expected return. Paying that much for an equity fund may be worth it, but it would be better to hold bonds directly or at least choose a low-fee bond fund, such as an exchange traded fund (ETF) for which the MER is less than 0.5 per cent per year.


6.
DO - Increase your international exposure: Although a rising Canadian dollar has hurt those investing outside the country, international investing could be more lucrative from now on if this trend doesn't continue. Either way, you will reduce risk in the portfolio by diversifying outside Canada.


7.
DON'T - Borrow to contribute unless you can pay back the money within a year: Interest on such borrowings is not tax-deductible. It may be better instead to start working on this year's contribution by living on a budget and setting up a 'pay yourself' regular monthly contribution plan.


8.
DO - Find an investment advisor you can trust: You need things in writing (especially if something goes wrong and you need to engage a lawyer) and you need to verify by reading all the fine print. Remember, it's your money and nobody will care about it as much as you.


9.
DON'T - Ignore the income-splitting benefits of contributing to a spousal RRSP: The federal government's new pension-splitting rules mainly apply starting age 65 and if you are smart in your RRSP investing, you probably will be in a position to retire earlier than that.


10.
DON'T - Forget to diversify: Large pension funds spread out investments among stocks, bonds, income trusts, cash (short-term investments), commodities and hedge funds.

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Lina Feng 冯莉娜
Financial Services Manager
Bank of Montreal
3481 Cook Street
Tel:（250）405-2355  
lina.feng@bmo.com