For many, RRSP season comes as an annual reminder of how little they've saved.
And for those in their late forties or fifties, too loaded with day-to-day financial burdens to put aside much for retirement, the hype about RRSP contributions may create acute anxiety about whether they've left it too late.
Patricia Lovett-Reid, senior vice-president for TD Waterhouse Inc., says she is constantly being asked about this issue by people in their fifties. Her answer: "I don't think it is ever too late."
Those who have been working but not contributing to an RRSP in recent years likely have a sizable amount of contribution room that has been carried forward from year to year, Ms. Lovett-Reid says.
Using up this contribution now is a good way to kick-start a retirement fund.
The major challenge is finding the wherewithal to make this investment, according to Ms. Lovett-Reid and other investment advisers, who recommend various strategies that can help latecomers get off to a start.
A key first step is to do an inventory of all assets and debts, while reviewing goals and expectations for your retirement years, suggests Zane Reid, the Bank of Montreal's mutual funds manager for Southwest Ontario.
Even latecomers to RRSP investing may discover that reaching their financial goals is easier than it may appear, thanks to the magic of compounding and tax-deferred growth, says Mr. Reid. But, he adds, there is no magic answer to the question of how to get your hands on cash, if you don't have any sitting in a savings account.
An RRSP loan, available at many banks for close to the prime interest rate of 4.25 per cent, is one option Mr. Reid and other advisers suggest, though it has the obvious drawback that you do have to pay it back and need the cash to do so.
If your RRSP contribution creates a tax rebate, you can use this as soon as you receive it to repay part of the loan. Ms. Lovett-Reid notes that most banks offer a 90-day deferral on loan repayments, while you wait for your refund.
For people in a high tax bracket, a loan makes perfect sense, she says, noting that someone in the 40-per-cent tax bracket taking out a one-year loan for $10,000 will likely end up paying less than $250 in interest while saving $4,000 in taxes.
While many advisers do not recommend taking out RRSP loans for more than a year, Mr. Reid suggests that a big multi-year loan can pay off well for people in high tax brackets, since they can get 40 per cent of their money back in tax refunds and may be able to find investments that earn more than the costs to borrow the money.
But Mr. Reid warns of a risk to this strategy, since the need to increase your investment earnings may encourage you to tilt the balance of your portfolio in favour of equities that promise a higher rate of return, but more volatility, than cash investments or bonds.
Still, you have to weigh this risk, he says, against your need to grow your investments in a relatively short period of time. "If you're investing at 3 per cent, the risk is that you will not reach your goal."
But don't be in too much of a hurry, suggests certified financial planner Jonathan Sceeles, an adviser with the investment firm Edward Jones. "There is a tendency to take greater risks by chasing more aggressive investments in an effort to build the bundle faster. In bull markets, like the one that is currently shaping up, there is an even greater tendency to throw caution to the wind and load up on equities and whatever is hot in the market right now," he says.
"RRSP late bloomers need to temper their enthusiasm with patience. Seek sound, long-term advice even though retirement may be looming. Remember that many of us will be retired for 20 or 30 years, much longer than a single market cycle, so your investments need to survive the next market correction, which could come at any time and without warning."
What Mr. Sceeles suggests is a strategy of buying government strip bonds every year, as part of an RRSP contribution. For example, if you are 10 years away from retirement and have $10,000 to invest this season, a 10-year, $10,000 government strip bond will cost about $5,500 today. This will free up the remaining $4,500, which can be put into more aggressive investments, he says.
"Even if the equity markets are rocky, or dive just before your retirement, you will have at least the initial $10,000 contribution coming due your first year in retirement (plus the income tax savings today). If you repeat this strategy every year until you retire, you will have assured at least a $10,000 income from your investments for the first 10 years of retirement," he says.
John Di Sabatino, an investment adviser with Royal Bank of Canada's RBC Investments, suggests an annual purchase of a labour-sponsored fund as another strategy for growing an RRSP portfolio quickly. He says these are a great investment for people without a lot of capital, since tax credits and RRSP deductions mean that up to 66 per cent of the investment could be subsidized by the government.
Ms. Lovett-Reid says other strategies for people with limited cash to contribute to an RRSP include contributions in kind -- putting other assets, such as equities, that you may hold outside an RRSP into a tax-sheltered RRSP. The drawback is that you may have to pay capital gains tax when you do this and you cannot declare capital losses for investments that you hold in an RRSP, she adds.
Owners of a small business or people starting off a business that has the potential to grow can put shares of their business in an RRSP, says Ms. Lovett-Reid, but she notes that this is not permitted if you are the controlling shareholder of a corporation.
Holding your own mortgage within an RRSP is another option, says Ms. Lovett-Reid, who doesn't recommend this strategy for amounts of less than $50,000 since you have to pay legal fees, insurance and appraisal fees.
Furthermore, she says, you have to charge yourself the going market rate. "It's not for everyone."
People with low incomes may want to think twice about contributing to an RRSP later in life because it might result in their government benefits being clawed back after they retire, says Ms. Lovett-Reid, who suggests that it may sometimes be better to hold investments outside an RRSP.
"Sometimes, when people haven't saved, it's for a good reason," she adds.
© The Globe and Mail
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