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Top 10 Dos and Doníts in RRSP Investing

by Wayne Cheveldayoff, 2007-01-25

The goal of RRSP investing is a comfortable retirement. Here are 10 guiding principles to get you there.

1. Donít procrastinate when it comes to contributing to an RRSP. Itís not going to happen by itself. You need to make a plan, take action and be decisive. Itís your life in retirement.
2. Take full advantage of the power of tax-free compounding within the RRSP. That means contributing as much as possible early in life, even if it means postponing the purchase of a house. A common regret among those now approaching retirement is that they didnít put enough money into an RRSP early on. A person starting annual contributions of $5,000 at age 25 would have $998,176 at age 65, but only $204,977 if the contributions started half-way there at age 45 (assuming a compound return of 7 per cent annually).
3. Work hard to research alternatives or use an investment advisor to achieve the highest possible longer-run return. The person contributing $5,000 a year from age 25 would have an extra $296,567 in his or her RRSP at age 65 if the average annual return in the portfolio is 8 per cent instead of 7 per cent. Check out the numbers on one of the free RRSP calculators located at a bank or mutual fund website or at
4. Donít take funds out of your RRSP unless you are in a dire emergency. Not only will the withdrawal be fully taxed as income, you will miss out on the tax-free compounding mentioned above. In the meantime, you will be giving up valuable RRSP contribution room. With interest rates low, it may make more sense to borrow the money you need, including for buying a house (there are now 100% mortgages available) or for education.
5. Donít pay fees unnecessarily. Fees drag down returns, so make sure you are getting value for money for any fees you are paying. This means you have to find out about the fees you are paying and judge if they are worth it. Many investment advisors count on you not thinking about it. A good example is a bond fund holding government bonds and charging a management expense ratio (MER) of around 2 per cent a year Ė thus chewing up half or more of the expected return. Another example is a balanced fund where the usual 2.5-per-cent MER is applied to the bond and cash components as well as to the equity component. Paying that much for an equity fund may be worth it, but it would be better to hold bonds directly or at least choose a low-fee bond fund, such as an exchange traded fund (ETF) for which the MER is less than 0.5 per cent per year.
6. Donít borrow to contribute on a catch-up basis unless you are sure you can pay back the money within a year. Interest on such borrowings is not tax-deductible. It may be better instead to start working on this yearís contribution by living on a budget and setting up a Ďpay yourselfí regular monthly contribution plan.
7. Donít ignore the income-splitting benefits of contributing to a spousal RRSP. The federal governmentís new pension-splitting rules mainly apply starting age 65 and if you are smart in your RRSP investing, you probably will be in a position to retire earlier than that.
8. Donít forget to diversify your RRSP investments. Large pension funds spread out investments among stocks, bonds, income trusts, cash (short-term investments), commodities and hedge funds.
9. Do increase your international exposure to 40 or 50 per cent. People with high foreign content hadnít been particularly rewarded in recent years given the 40-per-cent rise in the Canadian dollar, but that phase is over and international investing will be more lucrative from now on and will reduce risk in the portfolio.
10. Find an investment advisor you can trust but donít make the mistake of thinking that trust is enough in such a relationship. You need things in writing (especially if something goes wrong and you need to engage a lawyer) and you need to verify by reading all the fine print. Remember, itís your money and nobody will care about it as much as you.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. His columns are archived at and he can be contacted at

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©2007 Wayne Cheveldayoff