By Aman Raina, SageInvestors.ca
Special to the Financial Independence Hub
In the early part of the New Year we see, hear, and read a lot of messages regarding Registered Retirement Savings Plans (RRSPs). From every indication, they are important to have as a saving tool as we get older.
RRSP and Containers
Before getting to why it is important, a quick overview of the RRSP concept. The best way I can explain the concept of a Registered Retirement Savings Plan or RRSP, is that it is essentially a container. It can be a jar, a glass, a bathtub, anything that can hold something.
In terms of RRSP containers, I’ll keep this simple. You have several types to choose from:
Asset Specific RRSPs –can only hold a specific type of asset like a GIC or a mutual fund. You can hold multiple containers of Asset Specific RRSPs
Self-Directed RRSPs –can hold a variety of securities including individual stocks, bonds, ETFs, mutual funds, cash, GICs, Treasury Bills. They are much more flexible in terms of your options of what you want to put in your container. The banks and brokerages usually charge an annual fee for the privilege of using their containers, however if you have enough assets to put into the container or throw a lot of business there way, you can get it waived.
The great thing about RRSPs is that these containers are made of kryptonite which means Superman and the Federal Government can’t lay a hand and skim any income that is generated within it unless you take the money out first or you turn 71 when the container has to be swapped for another container called a Registered Retirement Income Fund (RRIF). That’s another discussion. In addition, whatever money you put into your RRSP container is tax deductible. In other words, you can reduce your taxable income and pay less tax.
RRSP Mating Season
You can buy and put money into your RRSP container anytime during the year, however, the financial services industry has developed a full-on marketing plan to somehow convince you to jump aboard and either buy a container or put more money into your existing container in the January/February period each year.
The big reason is that the Government allows you to use a contribution you make in January/February for the previous tax year. The goal for financial institutions is to get you to purchase their containers so you can store your hard earning savings with them. This allows them to pump up a figure that is make or break in their business: Assets Under Management (AUM). The more they can increase their AUM, the better their bonuses are going to be and also the better the opportunities they have to sell you up on their products which may or may not be in your best interest.
The RRSP setup mating ritual goes like this.
Rapid advertising in January and February (ironically after Christmas where you have just received your credit card statements) to coax you to get off your butt and either add more money to an existing RRSP container or to buy another RRSP container. You will get blitzed with slick, heart-tugging adverts showing your life sipping pina coladas in your late 50s and 60s and showing what life will be like if you put money into the RRSP.
You like pina coladas so you rush to your local bank or financial advisor and sign the papers to add or buy your spanking new RRSP container.
Then the big moment comes after you have setup the RRSP container and/or made your contribution. It is the moment the adviser asks the question, “How do you want to invest the money?”
This is where you freeze. You have no idea what to do. You’ve invested so much time in buying the container and you really haven’t put any time into what is the key activity you will need to be constantly addressing which is to figure out what to put in your container to make your savings meaningfully grow. The adviser senses your trepidation and will throw you the lifeline and say, “why don’t you just park the money in a money-market mutual fund or a 1 year GIC and think about it?” This sounds reasonable to you as it will give you some time to ponder your options. You decide to put your contribution into a money-market fund that pays 0.25% per year (if that)…
…and there it will stay for until next RRSP season when you undergo the same mating ritual with your bank.
It shouldn’t go down like this. Investors need to get past this RRSP contribution inertia.
The financial companies are fine with you parking the money. It’s a cheap loan for them because now they can lend it as a mortgage or a business loan and charge 3 or 4 percent interest. Oh yes we can’t forget about the nice bump up in the AUM. Bonus time!
It’s you who are losing and wasting precious investment time. That money in your container needs to grow (sensibly of course) to provide you with sufficient financial resources later in your life.
Sadly, the financial services industry doesn’t really care what you do with the money. They care that your money is parked in their RRSP container in their vault. They are more interested in selling containers rather than growing the assets inside it and the hard core marketing that we see in January and February is all about selling containers. The reality is that decision-making process for buying the RRSP container is a fairly quick one.
Most institutions sell pretty much the same containers. The only concern is the fees you have to pay and ultimately you want to choose the container that provides you with most investing options at the least cost. Once you’ve made that decision, your primary concern is to evaluate and make decisions on how you want to grow that money you have in the container. Unfortunately we are forced to spend so much time figuring out these containers we lose sight of the goal.
We do a great job of buying the containers, but when it comes to putting the effort to initiate actions to make our containers grow, we’re either scared, lack knowledge, or engage in the blind faith of advisers who may not have our interests at heart. If you already have bought your RRSP container, fantastic! You have taken a big first step. If you have been filling up your container with your hard earned savings, bravo! Keep it up. If you have been parking your money each year waiting for the ideal time to make some decisions on what to do, there is no time like now. Time is ticking away. Your priority is to take actions to make that container grow. Ignore the commercials and the investing inertia and make it happen! Read investing blogs and web sites, research individual companies and investment products like ETF’s, educate yourself on the principles of creating wealth finally take action!
Aman Raina, MBA is an Investment Coach and founder of Sage Investors, an independent practice specializing in investment coaching and portfolio analysis services. This blog was originally published on his website in 2014 and is reproduced here with permission. On January 26 between 1 and 2 pm, Aman will be giving a free webinar on RRSPs and TFSAs but it’s limited to the first 50 who sign up. To register, please go to his website here.