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The Companion Advisor: Retirement Planning

Where retirement is concerned, borrow for tomorrow

The key to a comfortable retirement is all in the preparation. One of the best strategies to achieve a financially secure retirement is maximizing your RRSP contribution every year and sticking to it throughout your working life.

However, for various personal reasons, many Canadians neglect to make their maximum annual contributions. Research by Trimark Mutual Funds in 1997 found that only 24 per cent of us made our maximum allowable contribution for 1996.*

This example compares an annual RRSP contribution of $8,500 with one of $13,500 and assumes a nine per cent average annual compounding rate of return over 20 years. After a 20-year period, the additional $5,000 contribution at the end of each year increases an investor’s portfolio by almost 59 per cent.

This chart is for illustrative purposes only.

It's unfortunate that so few of us maximize our allowable contribution because, as the graph shows, the value of time and compound growth over the years provide the greatest potential.

By maximizing your contribution, you could be ahead by more than $250,000 after 20 years. Certainly, in some years we may not have the money to maximize our contributions and that is when an RRSP loan makes sense. Yet only 12 per cent of Canadians took a loan in 1996 to finance all or part of their RRSP contributions.* And while you may want to assess taking on “bad” debt (i.e., debt for consumer purchases), you should carefully consider “good” debt (i.e., debt that will help you invest for the future).

With today’s low interest rates, an RRSP loan makes even more financial sense. That’s because the actual cost of the loan is relatively small compared to the savings growth you could achieve. And, although the interest cost for the RRSP loan isn't tax deductible, any income tax refund you get can be applied towards repayment of the loan.

Using an RRSP loan to maximize your contribution is a smart move that will open up your investment options. Many financial institutions offer RRSP loans. Be sure to use one that offers competitive features and lets you invest the proceeds of the loan in RRSP-eligible investments that are right for your portfolio.

*Source: Trimark Monitor, 1997. ® Trademark of Trimark Investment Management Inc.

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© 1997, Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.

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