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Learning Centre

Ten Most Common RRSP Mistakes to Avoid

By: Wayne Rothe CFP

Most investors make lousy investment decisions. They zig when they should zag, often doing the worst thing at precisely the worst time. They're eager to invest when the market is high, usually into the wrong investments. We love to buy what's hot. We should buy low, but somehow seem incapable of doing that.

RRSPs should be the backbone of retirement savings for most people. But there are so many decisions to make. How much to invest into an RRSP? What kind of product to buy? What institution to go to?

In my financial practice, I see many RRSP errors. Some of these are serious and can severely damage retirement savings. With apologies to David Letterman, here are my top 10 RRSP mistakes.

1. Leaving your contribution to the final days
   
   

   It's best to make your contribution at the start of the RRSP year, in January or February. You'll get up to 14 more months of tax-free compounding. If you can't contribute early in the year, set up a monthly contribution plan by pre-authorized contributions from your bank account.

2. No coordinated plan for your RRSPs
   
   

   Most people just throw their money at whatever looks good at the moment, with no regard to the planning that should accompany the decision. You need to consider things such as the return you need on your investments and your retirement goals. Work with a Certified Financial Planner professional to create a coordinated financial plan.

3. Not using spousal RRSPs properly
   
   

   This is a biggie. Spousal RRSPs may save you several thousand dollars in taxes each year in retirement. Yes, I said thousands of dollars each year! Ask your financial planner if you're using spousal RRSPs properly.

4. Making meager contributions
   
   

   Royal Trust says the average Canadian will have about $72,000 in an RRSP by age 65. Put that into a RRIF (registered retirement income fund) earning six per cent a year and you'd have an after-tax income of about $4,000, rising to about $7,800 a year by age 89, assuming you withdraw the required annual minimum.

5. Underestimating how much you'll need to retire
   
   

   If you want an annual after-tax income of $30,000 a year, you'll need about $527,000 in your RRSP at age 65 at a return of six per cent. If you average 10 per cent, you'll need $350,000. Work with a financial planner to calculate these numbers.

6. Not beginning RRSP contributions early enough
   
   

   If you start contributing monthly at age 20 and contribute for only 10 years, you'll have more in your RRSP at 65 than someone who didn't start until 30 and contributed the same monthly amount for 35 years. Starting early is huge!

7. Foregoing contributions because you can carry them forward
   
   

   Unused RRSP contribution room can be carried forward and made in future years. Don't let this be an excuse to delay contributions. If you can't afford to contribute now, what makes you think that you will be able to make much larger contributions later? Keep your contributions up to date.

8. Too many RRSPs
   
   

   You can have as many RRSPs as you want, but you may pay fees if you open a new one each year. Too many RRSPs can also make it difficult to track your investments.

9. Not considering a self-directed RRSP
   
   

   A self-directed plan gives you a wider choice of investment options and should reduce risk. I often suggest a self-directed plan once a client's RRSPs total $40,000.

10. Using your RRSP as a savings account
    
    

    Listen up, folks. An RRSP is intended for retirement. With rare exceptions, this is not a savings account to buy a car or a winter vacation. I hate it when people with under-funded retirement savings decide that a trip to Cancun is more important! Those unwise RRSP withdrawals cost you big time later.