Get your RRSP out of the parking lot and back on the road to financial freedom

In the past year, did you “park” your RRSP contribution in money market funds or term deposits? It seems like the safe thing to do when market volatility takes hold, and the road to your retirement dreams gets bumpy.

But remember that retirement planning is a long haul. You’ll cruise along some smooth stretches, and you’ll find some ups and downs too. The important thing is to keep on trucking. Unfortunately, with your RRSP assets parked in money market funds and term deposits, you’re not really moving at all. With today’s low interest rates, your investments will barely keep up with inflation.

Investors who know the road say that equity mutual funds are the best cargo for making a good return over the long haul. So load up, and steer your RRSP away from the roadside rest area and back on the freeway. Ease into gear by setting up a Pre-Authorized Contribution Plan. With a PAC Plan, you automatically invest a fixed amount of money every month in your chosen mutual funds. Contribute as little as $100 per month, or as much as your budget allows.

Your PAC Plan keeps you headed in the right direction thanks to dollar cost averaging. That’s a fancy name for a simple idea. It means that your fixed dollar contribution naturally buys more mutual fund units when prices are lower, and fewer fund units when prices are higher. Over time, this strategy helps you enjoy higher potential gains.

Contribute early in the year for 2008, rather than waiting until the last few weeks to contribute to your RRSP. It makes much more sense to make your contribution early in the year. The best strategy is to make your RRSP contribution on January 1 for the current tax year, rather than waiting until the March 1 deadline the following year. By doing this, you’ll have an extra 14 months of tax-free accumulation in your RRSP. That extra time can translate into thousands of dollars more in tax-deferred retirement income over the life of your plan.

For example, Mark, a 30-year old investor just starting out who contributes $3,500 to his RRSP at the end of each February following the tax year would accumulate $588,463 by age 65 (assuming an 8% compound average annual rate of return). However, if Mark had made his contributions at the beginning of the tax year (e.g. January 1, 2006) rather than waiting until the contribution deadline 14 months later (e.g. March 1, 2007) his RRSP earnings would grow by an additional $62,895 over a 35 year period, giving him a tax-sheltered retirement portfolio of $651,358.

Another advantage of investing your money in January or February is the ability to deduct contributions for either tax year. Contributing early requires that you estimate how much you’ll be able to contribute to your RRSP, based on the prior year’s income. The Canada Revenue Agency (CRA) tells you what that limit is in your notice of assessment, which is sent after you file your income tax return.

Whether you invest early or regularly through a PAC, the key is to get out of the parking lot and into moving traffic, where you can speed up your returns and get to your destination.

Mutual funds are offered through Credential Asset Management Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated. This article is provided as a general source of information and should not be considered personal investment advice, tax advice, or solicitation to buy or sell any mutual funds and other securities. ^®Credential is a registered mark owned by Credential Financial Inc. and is used under licence.

March 26, 2008