Dale Jackson

Personal Finance Columnist, Payback Time

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The revelation comes one week after an Edward Jones survey showed over half of Canadians are making a contribution to their registered retirement savings plans (RRSP) ahead of the March 1 deadline, way up from 33 per cent last year.

Together, the surveys suggest more of us are blindly saving for retirement.

The short-term motivation to make a contribution is likely a tax refund in the spring but the end of this year’s RRSP season brings an opportunity for a long-term view.

Here are five resolutions to get your retirement plan on the right track.

LONG-TERM CONTRIBUTION PLAN

If your plan is to contribute as much as possible in a panic ahead of each RRSP contribution deadline, it isn’t much of a plan.

Knowing how and when you will retire requires knowing how much you will contribute over the years. 

You can avoid the stress of an RRSP deadline by setting up a regular contribution schedule with your financial institution.

You can also boost your contributions by re-contributing your tax refund, which will result in another tax refund.

It’s important to know that contributions can be parked in cash and invested whenever you want.

INVESTMENT STRATEGY

In addition to relieving deadline stress, making regular RRSP contributions allows cash to accumulate and be invested when opportunities arise.

It also allows you to employ an investment strategy called dollar-cost-averaging, which averages out the purchase price for investments that go through short-term volatility. If the investment goes down in value, the average price per share or unit also falls - lowering the break-even point.

As an example, regular contributions to a market-weighted exchange traded fund (ETF) that tracks an index like the equity benchmark S&P 500 will likely go up over the long-term because major stock markets always have. 

There are all sorts of workable investment strategies to maximize returns and limit risk such as allocating a portfolio between stocks and bonds, and diversifying equities across sector and geographic lines.  

A qualified advisor can help.

TAX STRATEGY

A good tax strategy is also a good investment strategy because it allows more tax dollars to compound in investments over time.

In addition to re-contributing tax refunds, big tax savings can be achieved by claiming RRSP contributions strategically. Contributions do not need to be claimed in the year they are made, which allows you to generate bigger tax savings by claiming them in higher income years. (Refunds are based on your marginal tax rate, which rises with your level of income).

Remember, RRSP contributions and the investment gains they generate over time are fully taxed when they are withdrawn. RRSPs that grow too much in value are subjected to a higher marginal rate and could result in Old Age Security (OAS) claw backs later in life.   

In many cases, bigger long-term tax savings can be achieved by contributing to a tax-free savings account (TFSA). These contributions can not be deducted from taxable income, but withdrawals are never taxed. 

REVIEW FEES

Lower investment fees also leaves more dollars to compound in investments over time.

Some types of mutual funds have annual fees that exceed three per cent, which means your investment would need to generate over eight per cent to produce a five per cent return.

Many actively-managed mutual funds perform well regardless of their fees but most passively-managed ETFs charge a fraction of the fee. Fees can be further reduced by investing directly in the market. 

Long-term returns are usually higher with the guidance of a qualified advisor. Many are worth their fees and some earn them by finding ways to lower fees.  

PLAN FOR A LIFE OF RETIREMENT

If retirement is a long way off its more important to make contributions than to figure out how and when you will retire. 

That doesn’t mean you can’t start thinking of retirement now; how much you will need to support the lifestyle you want.

There are a lot of unknowable variables in a retirement plan but it’s better to have more money than life, than to have more life than money.