Invest in your future with an RSP

Fred: Welcome to the Scotiabank “Find the Money” podcasts. I’m Fred Ketchen, Director of Stock Trading for ScotiaMcLeod. These monthly podcasts call on some of Scotiabank’s most knowledgeable experts to help you make the most of your money. Here we’ll discuss strategies designed to put you in the financial driver’s seat.

This month we’re talking about the importance and benefits of Registered Retirement Savings Plans and how with them you could build savings and wealth over the long term.

Joining us is John Kellett. He is the Senior Advisor Mutual Funds at Scotia Cassels. Canadians investors, John, spend more time planning their vacation each year than they do planning their investments. Why is planning for retirement then so important?

John: Well, it’s important to maintain the lifestyle that the individuals enjoyed while working, in their retirement. A recent study by the A.A.R.P. in the United States shows that 75% of retirees spend more time focusing on building and maintaining their principal than they do enjoying their lifestyle. So the more you have going in, the better the lifestyle after you retire.

Fred: John, what are the short and long term benefits of investing in an RRSP?

John: One of the most attractive aspects of an RRSP, Fred, is that you reduce your current income tax. Yes, eventually, you’ll pay the income tax piper but hopefully at that time when you’re retired, you’re in a lower tax bracket, and the collateral benefit is that those tax savings can then be invested and you can earn returns on the tax savings all the way through till you eventually have to stop paying taxes when you collapse the RRSP or retire it.

Fred: Why is it important to maximize contributions?

John: First of all, you lose tax-deferred growth if you don’t maximize contributions. You lose years of compounding, and compounding has been called the “eighth wonder of the world” and really its interest on interest and it’s a magic bullet for enhancing both returns and assets.

Fred: That’s like making money on your money, making money on your money, over and over again.

John: That’s quite right. So I love compounding and that’s how it works.

Fred: What happens if I don’t have the money to maximize?

John: Well, there are different avenues opened to you. You can borrow to invest. My preferred option is to start saving automatically now, so that people can have that contribution taken care of for the next year.

Fred: So, that’s like having a savings plan then. That’s basically what you’re talking about.

John: Absolutely.

Fred: How much can Canadians contribute to their RSPs?

John: Typically, 18% of their gross income up to a maximum of $19,000.00, and that maximum according to recent changes of the tax act will increase every year to 2010. Plus, you can contribute to what you’ve missed in the past years; you can make that up in a current year.

Fred: And how do you find out the exact amount?

John: People should refer to their “Notice of Assessment” or contact the Canada Revenue Agency.

Fred: Many Canadians, from my experience, will wait until they're near the RRSP deadline and then make a lump sum contribution, is that okay?

John: Well, any contribution is better than none, but regular is better. Personally, I like to avoid market timing. So if you just take a lump sum and put it in the market right at the end of the RSP season, you’re not doing yourself a favor because then you come up with market timing and it could be bad. So, put it in on a regular basis and that’s going to be a better approach.

Fred: So, that regular basis contribution, then is that what you would say is “dollar cost averaging”?

John: Very much, and there was a recent statistic that came out that over the last twenty years, the stock exchange in Canada has averaged about a 9.3% annualized return; and if you missed the ten best days, that’s in twenty years, ten days, you lost about 25% of that return. So, you really do want to avoid the possibility of missing some of these key moments in the market.

Fred: What happens if people realize that they have fallen short of their maximum or they still have some contribution room?

John: Well, they can borrow to invest - they can use a line of credit. Some recently have been using equity in their home, so borrowing against that. Of course, if they do, they should pay it back as soon as possible, taking the tax refund generated by the RSP activity and applying it against the loan line.

Fred: I think that’s very important to remember because some people will take the tax refund and will spend it on something else rather than paying down their financial obligations. What type of investments should listeners consider?

John: Well, it depends on what type of investor they are, and it’s based on time horizons, investment goals, risk tolerances… so, for example, people who are a little older would probably be thinking more in terms of fixed income investing rather than capital gains investing in stocks. Partly because, once your RSP comes up in retirement, it's run-down and you’re paying full taxes on it, so you’re not getting capital gains taxed. Diversification is important. A diversified portfolio has a combination of cash, which we all understand, fixed income - typically bonds, although there are mortgages and other such instruments - equities, stocks which can be domestic, Canadian, or international. The rules are being changed over recent years to allow more international investing in RSPs; and the best advice I can give is to have individuals go to their advisors who will do an analysis to determine which combination is best for them.

Fred: Certainly, diversification as you pointed it out is important and when you have an RRSP and you got some cash, you’ve got some fixed income paying interest, you’ve got some equities, you are fairly well diversified for the very simply reason that if all of the sudden the stock market where you take a bit of a dive, you are protected to some degree by the other ingredients which make up your investments within your RSP. John, finally what is this year’s RSP deadline?

John: February 29, 2008.

Fred: That’s coming up before too long. You must remember that date because after that it goes into the next year’s contribution plan if I’m not mistaken.

John: That is right.

Fred: Well, thank you, John, for sharing with us why and how we can all take advantage of our RSP savings capacity and have more money for retirement and all of our long term goals. We hope we’ve explained to you how the RSP is the best way to insure you’re taken care of in your retirement years, and how important it is to maximize every year and catch up if you still have contribution room.

Thank you for joining us. I’m Fred Ketchen, for more information; please visit your local Scotiabank branch. We’d love to have the opportunity to talk with you.