Based on my personal experience as a financial advisor for the last eighteen years, I have seen the rise and fall of RRSP planning.
Back in the early 1990s, I saw investors pour into RRSPs trying to maximize every tax deduction and save for retirement. Today, investors are wondering if it is still a good idea. Remember, it is a tax deduction today, not at retirement.
Here are some of the mistakes I have seen.
First, procrastination, putting it off each year and then planning to really save at a later date. The key factor as an investor is time and the compounding growth. Investing a small amount earlier may help you retire earlier.
Second, not knowing the real cost of your retirement. In retirement planning, I never ask when you want to retire, but how much do you need each month to retire. Keep that number in your head as your key retirement goal. If you have enough to meet your plans, then you are in control to say when you will retire.
Third, not understanding what risk really means. The greatest risk to investments that very few people are aware of is inflation. Over time inflation erodes returns, reducing your future buying power. To keep ahead, your money has to work for you and your portfolio returns need to keep ahead of inflation.
Fourth, inadequate diversification. Diversify your portfolio by asset class, geography and style of investments. Do you have all your equity investments in Canada? Can you name at least three or four holdings inside your RRSP right now? Are you comfortable with these holdings? Ask yourself these three tough questions.
Fifth, buying mutual funds based on last years performance. Hey, anyone can pick a five star fund, thats why they rate funds, so everyone can pick them. Find a consistent performer and management style over the long term say five years. Be sceptical of spectacular performance results from small funds. High one year numbers should set up caution flags. Remember, as investors we are looking for bargains.
Sixth, staying too long with loosing investments. I know it is difficult to change, but if you cannot change, ask for help. Talk to an advisor who can help you change what is not working. One phone call may give your portfolio new life.
Seventh, missing income-splitting opportunities by purchasing spousal rrsps. Although the new government rules allow for income splitting in retirement, it may not apply to you or the government rules change again.
Eight, not naming a beneficiary. Your spouse can receive your rrsp tax-free and you can also name a charity (with certain provisions) as beneficiary also.
Nine, disorganization. Having statements all over the place and missing maturities and holdings. Ask your advisor to help consolidate and get organized.
Tenth, not realizing how easy it is to transfer rrsps from one institution to another. Most financial institutions can hold assets of any kind and to transfer assets is relatively easy and tax-free.
Good luck avoiding making RRSP mistakes with your plans in 2007!