Seven tips to build a fat RRSP nest egg
We’ve all heard it before. The biggest enemy to your financial future is you. This of course is true. I’ve learned to appreciate this fact more than fiction because of my own investing experiences. I used to tinker with investments in my Registered Retirement Savings Plan (RRSP) in my 20s. Chase this hot mutual fund; chase that one. I always felt like I was playing catch-up when it came to fund performance (and I was).
Over the years things have changed for me – big time.
I learned more about investing and my behaviours related to market swings, so I’ve been able to rid myself of very poor investing habits. Staying out of my own way is just one way to build a fat RRSP nest egg.
Here are six more tips.
1. Focus long-term
Investing is not a race and it’s not a fad. The very definition of an investment is an asset purchased with the hope it will generate income or appreciate in value in the future, so from an economic sense, assets are not used today. This is why time in the market is your friend. Use the RRSP and select assets for this account to hold long-term.
2. Select enough equities to marry your risk tolerance
Over long-term periods of investing, stocks generate higher returns than bonds and bonds generate higher returns than cash under your mattress. The higher the allocation to equities, for longer, the better your returns should be. That said you may want to temper your equity exposure to less than 100% because bull markets tend to make investors feel far more confident than they really are; Mr. Market has a way of exposing bad investor behaviour by making you sell assets at the wrong time.
3. Save and then consider saving some more
Although rates of return are important your savings rate is a huge factor when it comes to financial wealth. Take this quick example:
John saves a little bit every month. John is 30 years old. John has $25,000 in his RRSP and contributes $300 per month to it. Assuming John has all stocks in his RRSP, and his portfolio returns about 7% on average for the next 30 years, John’s RRSP portfolio value will be a tidy $554,000.
Suzie the saver pays herself first every month and is diligent at it. Suzie is also 30 years old and has the same $25,000 accumulated in her RRSP. Unlike John, Suzie contributes $600 per month to her RRSP account. Suzie is much more conservative though with her portfolio, she will hold 50% bonds for the next 30 years. Although John’s returns are 2% more every year for 30 years than Suzie’s, Suzie will come out ahead of John thanks to her aggressive and larger savings rate. Suzie’s portfolio value will be close to $610,000 at age 60.
Consider saving enough every year to max out this account if you’re in a high tax bracket.
4. Consider rebalancing during “RRSP season”
Not sure when to rebalance your portfolio? Keep it simple. Consider rebalancing your portfolio once per year during “RRSP season” sometime between early February and early March. You won’t forget to do it at this time of year because there will be thousands of financial ads to remind you about your contributions to this account.
5. Use mostly indexed products
I suggest you do this certainly if you don’t want to invest in a number of individual stocks like I do. Even then, I’m a hybrid investor, I own a few low-cost ETFs and I hold a number of Canadian and U.S. dividend paying stocks. I’m indexing more going-forward to become more diversified. Diversification just makes sense. Besides, forget me, you should probably listen to Warren Buffett (as told to investors in his 2013 letter to Berkshire shareholders, when referring to his estate plan):
“My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”
6. Don’t raid the nest
This point probably needs no further elaboration maybe only to say spending too much money today, including any borrowed funds from your RRSP because you YOLO (You Only Live Once), is borrowing from your future self. I continue to thank my friend Preet Banerjee for instilling this thought into me.
Wait, you might say, there’s the Home Buyers’ Plan and this doesn’t count! I’m not a fan of this program friends. A house is a house, something you live in and hopefully it will appreciate in value over time. An RRSP is a retirement account. House rich but asset poor is not good diversification. Besides, when did home ownership become more important than retirement savings? These are not the same things.
RRSP power comes from a tax deduction for your RRSP contribution and tax-deferred growth. For Canadians who expect to be in a lower tax bracket in retirement versus their contribution years this account has lots of firepower to help you build a fat retirement nest egg.
What considerations did I miss for building a fat RRSP nest egg?
Great blog Mark. We have been index investors for 21 years now, investing steadily without pain and have definitely seen the wisdom behind this discipline. We also sell into the rallies to about 25% cash and then buy into the correction after a few weeks of declines. We limit our purchases and sellings to about 30% of our cash each transaction. We have made 12-18% returns using this method. It’s not for the faint of heart but it is something to do when the world is falling apart. Besides house is paid for and the company pension is my bond. Good investing to all. Bob
Bob, that is outstanding that you have the discipline and the foresight to continually buy when markets decline; rinse and repeating over many years. I have no doubt doing this while you ride markets higher is absolutely the best way to invest – index investing or otherwise.
Well done and thanks for the kind words about the site 🙂
Hi Mark…My wife and I retired at age 54, 13 years ago without pensions, had to wait years for CPP.
The biggest single wealth creator in our RRSPs was DRIPing every stock in there. Over the years it made a huge impact on our portfolios. Some companies offer a “premium DRIP”, which is a discount from their share price on their dividend payouts. IE) Interpipeline-5%, Riocan-3%. Also, your broker may offer a “treasury DRIP”, in which they will give you shares for your dividends without Broker fees.
Since TFSAs have come out, we DRIP everything in there.
Good Luck to all,
Congrats on the early retirement. Well done!
I hope to follow your lead, maxing out TFSAs and RRSPs and DRIPping as much as we can in each. We DRIP the following stocks in our TFSAs:
We also DRIP a number of other stocks inside our RRSPs – including ETFs like VYM.
We too, like the “premium DRIP” 🙂
All the best and thanks for being a fan,
I am always SO happy to see people speaking out against the Home Buyer’s Plan! When I saw a campaign promise to increase the amount people can withdraw, I almost choked. Seriously?!
Anyways, small rant over, and I love this post. I’m a new investor taking a higher-risk indexing strategy because I have a long timeframe ahead of me, and I couldn’t agree more with all of your points. After reading a whole lot more about personal finance over the past few months I also decided to aggressively up my savings rate, so I love that you included that as well. I’m really happy to have found your blog!
Glad you found the blog as well! Tell others 🙂
Seriously though, with the TFSA limit now $10k per adult I see no reason why to use the Home Buyers’ Plan (HBP).
I think if you’re young and you have 40-50 years of investing time on your side, there is no reason NOT to celebrate falling stock market prices and buy equities when days like Monday occur. Thanks for reading and sharing Des.
I understand completely. Tell me though – Aside from the ongoing MER, is there any reason keeping you from simply investing in XIU alone?
I prefer to stay in charge of the stock portfolio myself. For example, I own more than 1% utilities vs. 1% utilities in XIU. Not a big fan of gold companies either. Maybe eventually I’ll sell my stocks for XIU or VCN or VCE, just not now Chuck.
as i sit here today the dow dropped over 500 points and TSX almost 300. all gains for the year are gone. The only way clearly to sleep well at night is to own excellent dividend paying stocks! In all my reading of your blog I cannot see what you are invsted in. are you comfortable to share what you own?? perhaps i am not looking in the right spot? What CDN stocks do you own?
I hear ya Chuck, this is how I feel as well. My paychecks keep coming in from any CDN companies. I not comfortable in announcing online all the companies I own in the quantities I do but you can see from my dividends page I have a bias for large cap blue-chip stocks.
“What do I own?
Most of the holdings in the ETF XIU. These are Canadian banks, insurance companies, pipeline companies, telecommunication companies, energy companies and utilities.”
Great information Mark and covers the subject well.
I contributed for 21 years to my RRSP beginning age 23 and stopped 11 years ago due to self employment status, and now at age 56 (retired) have a little more than the amount Suzie has depending on what the market does each day!
The only other thing I can think of to add right now is to consider making the contributions monthly or at the beginning of the year for the coming year, gaining a little more tax free compounding time. I did this and used form T1213 to have my employment income tax reduced accordingly so that my funds were invested and working for me right away and I didn’t have to wait a long time to get my refund from the government.
Thanks for adding that…re: making contributions monthly or beginning of year. What works for us is monthly contributions, they are on autopilot now and have been for a few years as part of our “pay us Inc.” program. I figure if we don’t pay ourselves first, nobody will.
Hope all is well.
An valuable advices as usual, Mark! I am learning your strategies for RRSP investment step by step. I do have a question would like to ask you: How do you manage to purchase US dividend stocks in RRSP account with such not preferred exchange change rate? which online brokerage do you suggested for RRSP account? Questrade?
Thanks Jeanne. I can’t offer specific advice on this site for many reasons, but here in my personal take, on what I do. Your mileage might vary. I let the US assets I own inside the RRSP, that pay dividends and distributions in USD $$, accumulate and then I buy more US assets as to avoid any exchange rate. If I must or decide to convert CDN $$ to US $$, I have done in the past what I like call: the “My Own Advisor” gambit:
1. I buy a CDN company that is interlisted on the NYSE.
2. I buy the company in CDN $$, then journal it to the US-side of the RRSP.
There is also Norbert’s Gambit which is a bit more sophisticated:
I know Questrade offers commission-free ETF purchases:
Other discount brokerages offer some competitive prices on stock/equity purchases; most are less than $10:
Hope this information helps your research!
Read Buffett’s advice a few times and the conclusion is that his most important recommendation for Main Street investors is to seek low fee vehicles.
There are a handful of popular advisors etc. out there who state that friction — fees, taxes, etc. — will have the greatest impact on future investment returns, not necessarily the investments themselves.
Of course, investing in an index/a market aggregate (the average of all winners and losers) will give you a baseline foundation on which to build your other investment decisions.
I’m trying to follow more of this advice as well – keep your investment costs dirt low. I won’t be selling any of my stocks anytime soon, but indexing is making more sense to me as I get older and need more diversification to reduce market risk.
– Start financial planning young. When it comes to investing, time is your friend.
– Be flexible. Keep in mind that programs will change over time. When I started, there was no TFSA and RRSP contributions were very limited.
– Never look at any financial tool in isolation. Many people rant about how bad RRSPs are when they begin to pay tax on the income from it. They should have been aware of this from day one.
– When discussing RRSPs/RRIFs etc, understand the concept of marginal tax rates. Know tax brackets and where you fit in and where you will likely fit in.
– Not every plan works out. Illness, changing job market, family issues can all bite you in the butt.
– Having options is always better than not having options.
Excellent points Lloyd. You are welcome to write a guest post! I know I started saving young (in my 20s) but I didn’t save very much early on, I recall I started out with $50 per month, then upped it to a couple hundred per month in my 30s. Had I saved more in my early 30s I would have been better off.
I’m not sure how our RRSP/RRIF withdrawal strategies will work out. I have some ideas but I need to figure this out.
Last but not least, absolutely, having options is always better. Thanks for the detailed contribution.