With another RRSP season squarely behind us, now is as good a time as any for reflection. The last-minute mad dash to make a contribution is generally at odds with proper savings discipline. Certainly, the lump-sum approach encourages procrastination and a degree of stress -- what, you don't have $24,930 just lying around?
The alternative is making retirement saving a part of your regular routine. For many Canadians, the best way to achieve this is by setting aside money on a regular basis through pre-authorized withdrawals from your bank account. Automating your retirement savings helps you cash in on tax-deferred savings faster. It also helps you avoid the scramble of trying to come up with a lump-sum contribution before the annual RRSP deadline. By taking money right off your paycheque, it is like a forced savings and after a while you will not even notice it is missing from your cash flow.
Saving at regular intervals in a security such as a mutual fund is known as dollar-cost averaging, which can lessen the risk of investing a large amount at the wrong time. In other words, it can take the guessing game out of trying to time the market.
The 2015 Sun Life Canadian Unretirement Index shows that continued anxiety persists around retirement saving. Just 44 per cent of Canadians are satisfied with their retirement savings (11 per cent are very satisfied and 33 per cent are somewhat satisfied), which is up from 33 per cent in 2012. On the whole, Canadians remain unsure about their ability to achieve their financial goals.
Four ways to tackle retirement savings anxiety
You can turn anxiety around by extending your savings plan beyond the RRSP season. Here are a few other tips to keep in mind:
• Automate, automate, automate! If you haven't already, think about making retirement saving part of your budget through regular contributions spread out throughout the year. Speaking with a financial advisor can help you come up with a plan that works for your specific circumstances. Make saving a priority -- the sooner, the better! And remember it's never too late to get started.
• Tap into your tax refund. Instead of spending your tax refund, consider putting it into your RRSP. This is one way to boost your retirement saving and reduce the burden for next year's contribution!
• Fend off financial faux-pas. Taking money out of an RRSP to pay debts should be done with caution. In most cases, there are better ways to access funds without dipping in to your retirement savings. Tapping into your RRSPs early carries a tax impact and will affect your retirement plan. For shorter term goals, consider withdrawing from your Tax-Free Savings Account or other non-registered savings. You may also consider using a line of credit in emergencies if you don't have the ready cash.
Make sure you have a plan to pay this back; in addition, note the importance of having an emergency fund in the future. The two exceptions to drawing from your RRSP are the Home Buyers Plan, which allows first-time home buyers to withdraw up to $25,000 for their down payment and the Lifelong Learning Plan, which allows withdrawals of up to $10,000 a year from an RRSP to a limit of $20,000 for yourself, a spouse or a common-law partner who's going back to school. This is done as a loan and must be paid back within a specified period of time. Make sure you understand the rules.
• Don't just set it and forget it! Once you've made your RRSP contribution, remember to monitor your RRSP regularly. Work with a financial advisor to ensure you have a well-diversified portfolio that is in line with your goals and risk tolerance. Many investors make their RRSP contribution and invest it in the "hot" fund or sector, without taking into consideration how it impacts their entire portfolio or their goals. Imagine the impact of doing this year after year -- it can lead to a haphazard portfolio that doesn't line up to the investor's goals.
A constructive way to counter retirement saving anxiety is to create a financial plan that makes it a year-round activity. A financial advisor can help you come up with a plan that fits with your unique situation.
This article is provided for general informational purposes only and should not be considered specific financial advice. For advice specific to your circumstances, please speak to the appropriate tax, investment or insurance advisor.
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