For Canadians, Registered Retirement Savings Plans (RRSPs) offer two benefits over non-registered investments:
- Contributions are tax deductible
- Capital growth is tax-deferred
These two advantages combine to provide tax savings both now and in the future. The RSP allows transferring income tax from today, when the contributor is probably in a higher income bracket- to the post-retirement period, when the contributor will likely be taxed at a lower rate. "Nobody ever got rich by saving money alone!" is a common comment- it takes investment for growth. Financial managers stress the value of having a planned investment strategy.
So here are five ways to build up a retirement fund, from the Bank of Montreal (BMO Financial).
Maximize Retirement Investment Contributions
The more an investor can contribute to a retirement fund, the greater the potential gain. To pack the most money into that fund, try these tips:
- Consider a continuous savings plan (invest small amounts monthly)
- Many employers offer payroll deductions savings plans- take advantage of them. Money deducted at source is seldom missed, if the family budget is adjusted to the available income
- Investors who often have a tax refund should consider having the employer deduct less tax, then increase their monthly RSP contributions
- Make the largest affordable annual contribution
- Discuss with a financial planner the advisability of an RSP loan
- Use tax refunds to top up any unused contribution room
Follow an Investment Plan
Work with an investment professional, one who specializes in retirement planning, for retirement planning in order to maximize retirement income. A good planner (with the Certified Financial Planner designation, CFP) will look at such factors as
- Time Frame- how long until retirement- long-term planning gives the best results, but short-term strategies can be productive
- Risk Tolerance- how comfortable is the investor with market volatility?
- Ethical Investing- are there investments the planner should avoid?
- Money available for investing- make the most of funds the investor can spare
Diversify Retirement Investments
Most financial experts recommend a diverse portfolio as the key to managing both risk and return. A blend of guaranteed investment certificates (GICs), mutual funds, and equities (stocks) is generally considered the safest approach. The specific choice of equities and mutual funds can tailor the RSP towards growth or income, depending on the needs and plans of the individual investor.
Invest Globally as Well as Locally
Economic conditions starting in 2008 an on have led to protectionist attitudes of "Invest in America" or "Keep Canadian Dollars at Home." Nonetheless, there are still good investments in the world market, and including global investments from a wide variety of economic regions improves diversification.
Retirement Plans Need Regular Review
Conditions change- sometimes drastically, as the economic events of 2008-2009 demonstrated. An annual review of the performance and progress of the RSP measured against investor objectives can help a retirement plan stay on track.
Source: "In Focus", BMO Financial Group, Winter 2009
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