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Should You Save For Retirement? The Highs and Lows of an RSP Account

RSP stands for Retirement Savings Plan. It is a registered government plan designed to help reduce personal tax payments while you are employed, and help with your retirement funding. An RSP account can be opened online or at your local bank branch. Contributions can be made at intervals, such as on a monthly basis, or annually before the contribution deadline, which is the end of February. Simply put an RSP is a government program, which encourages citizens to save for their retirement.

The Highs

  • Contributions, how much and when, are at the plan holder’s discretion. As long as the contributions do not exceed the plan holder’s personal RSP limit (indicated on the annual tax return) and the contributions are made before the annual deadline.
  • Planning is key, government pension may not be enough to maintain the same lifestyle during retirement. An RSP will help with retirement funding and provide an extra cushion for a comfortable lifestyle
  • The RSP can be invested several ways and it is up to the plan holder to decide how to invest their contributed amount. Choices include: stocks, GICs (Guaranteed Investment Certificates, mutual funds and the good old savings account)
  • If starting to save early on, the contributions can be as little as $50/ month and if invested correctly can grow into hundreds of thousands of dollars
  • Contributions are tax deductible, potentially lowering your tax bracket and saving money on annual tax payments

The Lows

Here’s a perspective from the other side of a non-contributor:

  • Some do not believe in the RSP and instead choose to invest their money into real estate with hopes of gaining more money quickly from the growth in property value
  • Many are disappointed in the growth of their RSPs because the RSP account is not invested correctly, for example investing into GICs (Guaranteed Investment Certificates) during times when the interest rates are very low may not be the best solution and will definitely slow down growth over time. It is important to obtain financial advice on a regular basis to ensure the RSP account is invested according to current financial times and to ensure the RSP account is keeping up with annual inflation.
  • Some people are ill-advised and end up needing the contributed money sooner than their retirement. The downside is when the contributions are withdrawn earlier than the retirement date, there are heavy penalties involved, which end up in a higher tax payment at the end of the year.

Types Investments Available for Your RSP Account

The RSP program is a way to save for your retirement and benefit today with having the contributions deducted from your annual income. It is completely up to you how the RSP is invested. Below are the possible choices of investments available out there (not an exhaustive list). It is recommended to complete an investment profile questionnaire to determine what kind of investor type you are, i.e conservative, balanced or aggressive.

  1. Savings Account – the most basic way of investing your RSP, the good old saving account currently offers fairly low interest rates. It is recommended to keep your RSP in a savings account only when you haven’t yet determined how to invest it (temporarily).
  2. GIC (Guaranteed Investment Certificate) – Most GICs are locked in for a specific period of time. GIC interest rates are currently fairly low (because lending rates are low) however they may be able to beat the current inflation rate. GICs are considered to be a conservative way of investing, with zero risk and low return. Stability and peace of mind are the main benefits of a GIC. Some GICs may be linked to the market, which provides for a potential higher return.
  3. Mutual Funds – A mutual fund is a basket of various investments including stocks and bonds. Mutual funds involve risk of various type. Mutual funds come in different degrees of risk from conservative (low risk) to aggressive (high risk). When investing for a long term, it is generally advisable to seek higher risk investments for a potentially higher return. Ensure to complete an investor profile to determine what kind of investor your are.
  4. Stocks – Investing into stocks is generally considered high risk. Get to know the market first before dipping your feet in. There are blue chip stocks such as the major banks and corporations such as Google and Microsoft or TD, RBC etc. There are very aggressive high risk stocks such as commodities (gold, silver, oil etc). Research is vital prior to investing.

All in all, it is good to plan ahead and think about your retirement life. I would recommend calculating the income required in retirement and breaking it down to how much it is you need to save in order to get that goal. It is likely you’d want to maintain the same lifestyle as now in your retirement age, therefore planning is key.

Category: Back To Basics - FAQsInvestments

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Article by: Anna Suzdenkova

Employed in the financial sector for over 7 years. Held various roles including financial advisor, auto claims adjuster and manager of customer service. Attained an accounting degree with Honours. Mutual fund licensed. Passionate about helping people. Forever an optimist, positivity is the key to a happy life. Enjoys helping people decipher the banking world and use it to their advantage!