Those of us who don’t have a workplace pension – or want to augment it – are pretty familiar with what a registered retirement savings plan (RRSP) is. However, there can be tricky things to watch out for when investing your RRSP savings. Save with SPP had a look around the Interweb to highlight some RRSP pitfalls.

The folks at Sun Life identify five RRSP no-nos. First, they tell us, is the mistake of putting cash in your RRSP to meet the deadline, and then not putting it into an investment of some kind. Be sure you invest the money in something – “stocks, guaranteed investment certificates, mutual funds, bonds and more” so that your RRSP contributions grow. Your money grows tax-free until you take it out, so you need to have growth assets, the article says.

Another problem identified by Sun Life is raiding your RRSP cookie jar.

“Making RRSP withdrawals before retirement to, say, cover bills or make big purchases can have lasting consequences. For one, you’re giving up the years of tax-deferred growth your money would have generated inside your plan.” As well, the article continues, you’ll face a double tax hit – a withholding tax is charged when you take money out of an RRSP, and then the income from the withdrawal is added to your overall income at tax time. Double ouch.

Other things to watch out for, Sun Life advises, are overcontributing (be sure you know exactly what your limit is), spending your tax refund instead of re-investing it, and not being aware of RRSP/RRIF tax rules on death.

The Modern Advisor blog cautions folks against making their RRSP contributions “at the last minute.” If you spread your contributions out throughout the year, you will get more growth and income from them, the article advises.

Other tips include making sure your beneficiary selection is up to date, and knowing that contributions don’t have to be made in cash, but can be made “in kind,” such as by transferring stocks from a cash account to an RRSP account.

The RatesDotCa blog adds a few more.

On fees, RatesDotCa points out that many RRSP products, typically retail mutual funds, charge fairly hefty fees. “Canadians pay some of the highest fees in the world,” the article notes. “Over many years, these fees can add up, further reducing your retirement plan. Be sure to ask for a thorough explanation of the fees you can expect, and how they will affect your retirement plan,” the article advises.

Other ideas from RatesDotCa include not repaying your RRSP if you do borrow from it, not taking “full advantage” of any company pension plan (meaning, contribute as much as you can to it), and retiring too early (the article notes that both the Canada Pension Plan and Old Age Security pay out significantly more if you wait until age 70 to collect them.

Save with SPP can add a few more, gleaned from our own “welts of experience” over 45 years of RRSP investing.

Don’t frequently move your RRSP from one provider to another. This is called “churn,” and can result in hefty transfer fees and generally reduces the long-term growth needed for retirement-related investing.

If you borrow to make an RRSP contribution, do the math, and make sure the loan amount is affordable. Sometimes the bank or financial institution will want the money repaid within a year.

Be sure your investments are diversified, and include both equities and fixed income, plus maybe alternative investments like real estate or mortgage lending. Typically, if one sector is down, others may be up.

If you don’t want to think this hard as this about RRSP investments, consider the Saskatchewan Pension Plan. Contributions to SPP are treated exactly like RRSP contributions for tax purposes. You can’t run into tax trouble by raiding your SPP account because contributions are locked in until you reach retirement age. SPP offers a very diversified portfolio in its Balanced Fund, and fees charged by SPP are low, typically less than one per cent. Since its inception in 1986, SPP has averaged eight per cent returns annually – and although past results don’t guarantee future performance, it is a noteworthy track record. Check out SPP today!

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Before the pandemic, we read countless stories about how the savings rate among Canadians had fallen to its lowest level in decades.  Now, possibly due to the fact that the pandemic has limited our ability to spend money, the opposite is now true. We are reaching the highest personal savings rate we’ve experienced in 35 years.

According to a report in the Toronto Star, Canadians in 2020 “saved a greater chunk of their income than they had in three and a half decades.”  Canucks put away 14.8 per cent of their income last year, representing about $5,000 per person in savings.

“People weren’t able to spend on a lot of things they normally can, because of the lockdowns. And in some cases, they chose not to spend,” Pedro Antunes, chief economist at the Conference Board of Canada, tells the Star.

Save with SPP can still remember 1981, but at that time, working as a cub reporter, one’s focus was not on the long term, or savings. So, we had to check back to see what it was like the last time we had a high national savings rate.

At RatesDotCa, there’s a nice article that recaps what it was like 40 years ago for Canadian savers.

For starters, the article notes, interest rates were the opposite of what they are today – at all-time highs.

“If you’re not old enough to remember the recession of the early 1980s, your parents certainly will. In 1981, mortgage rates peaked at more than 20 per cent,” RatesDotCa reports.

“Many people whose mortgages were up for renewal during that period found themselves signing up for mortgage rates that were twice as high as they were just five years prior. Some resorted to paying hefty upfront fees to get private lenders to offer them rates in the mid-teens,” the article continues.

Other things – most goods and services – kept going up. The Inflation.eu website shows that throughout 1981, the consumer price index went up by more than 12 per cent. While your pay tended to go up to address higher costs of living, it usually didn’t go up as fast as prices did.

Save with SPP recalls getting a car loan at 16 per cent interest from CIBC. The effect of the high cost of borrowing was that we got a little used Plymouth Horizon – a little car for a big interest rate. Today, it’s the opposite – people are getting big houses and cars because it’s a low interest rate.

But we also recall the benefit of high interest rates on our savings back in the early 1980s. You could get a Canada Savings Bond that paid double-digit interest. It was the same story with GICs. Your parents and grandparents were probably chiefly buying interest-paying investments in those heady days. It was a thing, and payroll Canada Savings Bonds were commonplace.

Recently, we have begun to hear that our historically low interest rates may be on the rise once again.

The Globe and Mail reports that inflation went up 1.1 per cent in February, and one per cent in January. Rising gas prices are part of the upward push, the article notes. The Bank of Canada, the article notes, is expecting a 1.7% rate of inflation this year.

Will inflation hikes bring with them interest rate hikes – a return to the 1980s? It’s unlikely, says RatesDotCa.

“Although it’s unlikely that rates will hit the likes of 15-20 per cent again, we may very well see 5-7 per cent in the long run. That type of a jump may still be two to three times higher than your current mortgage rate.  Do you think you could afford paying nearly three times as much as you do today for your mortgage, and still afford those other essentials like heat and groceries,” the article warns.

The takeaway here is that things change. We have had low interest rates for so long, only us greybeards remember when we didn’t. Will savers start to pile into interest-bearing investments once again if rates begin to tick upwards? We’ll need to wait and see.

A balanced approach makes sense when you are saving for the long term. When interest rates are low, other investment categories – Canadian and international equities, real estate, and so on – tend to do better. But when you’re in a balanced investment fund, the experts are the ones who figure out when to rebalance, not you.

The Saskatchewan Pension Plan has a Balanced Fund that invests your contributions in Canadian and international equities, infrastructure, bonds, mortgages, real estate and short-term investments. All this diversity at a management fee of just 0.83 per cent in 2020. Put your retirement savings into balance; why not check out SPP today?

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