RRSP Strategies

Start with the basics by doing an inventory of your client's assets and debts, while reviewing goals and expectations for his or her retirement years. Because reaching those goals requires discipline, remind clients that it's beneficial to take the following steps in formulating an effective plan.

1. Start early

When clients start contributing to their RRSP earlier in life:

• There's more time for the income earned in the RRSP to compound.
• Total principal investment in the RRSP is comparatively smaller to reach same objectives.

2. Make contributions every year

As important as it is to maximize contributions, getting clients to contribute whatever they can every year will make the most of their investment strategy. (This year's contribution limit, which includes accumulated contribution room, can be found on the Notice of Assessment sent to your clients from Canada Revenue Agency).

3. Contribute as early as possible every year

Due to the effect of compounding on investment earnings in an RRSP, the timing of your clients' contribution can also have a significant impact on the accumulated value of their RRSP.

The following example shows how much more an RRSP can earn with an annual contribution early in the year, or through monthly contributions, compared with waiting until the end of the year to make the same contribution.

4. Contribute to their RRSP at the beginning of the year

5. Take advantage of Dollar-Cost Averaging

Because prices fluctuate, with dollar-cost averaging, your clients will buy more mutual fund units when markets are low and fewer units when markets are high.

There are a number of advantages to dollar-cost averaging:

• Your clients don't have to invest a large amount all at once
• Smaller amounts are easier to work into their budgets.
• Dollar-cost averaging can lower their average price and increase the number of units they can purchase.
• With dollar-cost averaging, there is no guessing about when to get in the market. There is no need to study trends or be a market expert. Professional money management is provided by the fund manager.
• Most importantly, dollar-cost averaging eliminates the temptation to buy wildly when the price is increasing and stop buying when the price is going down.

Review the following example in which a client's budget allows him to invest $200 per month for six months.

Note that the average cost per unit of $14.03 is lower than the average price of $14.17 for  the fund during the time period.

The $1,200 invested over six months is now worth $1,282.50, a gain of 6.9%.

If your client had invested $1,200 in month one, he or she would still have only $1,200 in month six because the price returned to your original $15 purchase price, assuming there were no dividends paid by the fund and re-invested during that time period.

6. Consider A Spousal RRSP

7. Consider contributing to an RRSP instead of paying down a mortgage

The RRSP-versus-mortgage question is a source of ongoing debate among many investors and financial professionals. There is no definitive answer. But, as always, the solution lies with an assessment of your client's personal and financial situation and their long-term goals and objectives.

Your clients / prospects have three possible options:

Option 1: Pay off the mortgage first and then contribute to an RRSP.
Your prospect gets a guaranteed after-tax return through their mortgage interest savings, which is important to many conservative investors.

Option 2: Contribute to an RRSP first and use tax refunds to pay down the mortgage.
This strategy provides further diversification for your client's investment strategy. Your client achieves mortgage interest savings by paying off the mortgage while building assets in the form of home equity. And, your client also begins building a retirement savings base as early as possible.

Option 3: Contribute to an RRSP and use tax refunds to contribute more to their RRSP.
This strategy maximizes long-term, tax-free compounding of RRSP assets, and gives your clients the psychological benefit of knowing they are building a capital base to fund their retirement. Should they decide to stay in their home during retirement, it's the RRSP capital base that will give them financial security.

Six conditions influence the choice of any of these three options:

• the mortgage interest rate,
• the expected return in the RRSP,
• the investment time horizon,
• the availability of RRSP contribution room,
• the ability to capitalize on mortgage prepayment privileges, and
• the client's ability to meet the financial obligations.

Rule of thumb: If the expected RRSP return equals the mortgage interest rate, and the investment time horizon is over 30 years, maximizing RRSP contributions generally maximizes net worth because the tax-sheltering advantages of the RRSP last for a lifetime, while the advantages of the mortgage prepayment end when the mortgage is discharged.

If the mortgage interest increases to a higher level than the expected return of the RRSP investment, or the investment time horizon decreases, it becomes more attractive to prepay the mortgage.

The answer always lies within your client's investment objectives and what is most appropriate for their personal and financial circumstances, risk tolerance, time horizon and goals for the future.

8. Take advantage of the RRSP refund

9. Consolidate their RRSP holdings for easier record keeping and better growth

There's no limit to the number of RRSPs your clients can own. But, review their holdings periodically to make sure that together they meet the client's objectives. And remember that when RRSPs mature, it's easier to move savings into a Registered Retirement Income Fund (RRIF) from one or two sources than from several.

10. Understand RRSP Over-contribution Limits