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The Companion Advisor: Retirement Planning

Why RRSPs should be the cornerstone of your portfolio

If you are like most people, you may feel the need to start making your investment decisions for this year right about now.

The fact of the matter is that your RRSP should be the foundation of your investment portfolio. RRSPs are not only the most enduring and important tax shelter available in this country, they're usually the best possible way for you to plan for your future. 

You just can't beat the fact that your entire eligible RRSP contribution is tax-deductible. If you're in the 40 per cent marginal tax bracket, for example, and contribute $5,000 to your RRSP, you are entitled to a $2,000 tax refund. So that $5,000 investment really only cost you $3,000. 

Even more significantly, the entire $5,000 you contribute into your RRSP is an advance toward your future. Invested prudently, it can continue to grow and accumulate interest, dividends and capital gains. It's all tax-free inside your RRSP until you're 71 years old and for decades after that, if you wish, inside your RRIF. By leaving your RRSP to compound and grow for all of the many years until your retirement, the money can multiply many times over. 

A few simple calculations will demonstrate what I mean. 

If you choose to invest $2,500 outside your RRSP every year, for instance, you would have to first earn about $3,500 and send the government $1,000 as income tax, assuming you're in the 40% tax bracket. You would also have to pay tax on your earnings from that annual $2,500 investment, every year. After 40 years, you would end up with a nest egg of $435,834, assuming a very conservative 10 per cent return. 

What happens when you invest that same $2,500 in your RRSP instead? You would have the full $2,500 to invest, and you'd get a $1,000 tax refund as well. Of course, all your profits inside your RRSP would be tax-sheltered as they grew. Your plan could grow to more than one and a quarter million dollars within the same 40 years. 

That's a 300% difference in your personal bottom line. 

If none of the above arguments have convinced you to maximize your RRSP contribution, this one should. Neither your present employer nor the government can afford to support you once you stop working. Only the very richest pension plans will provide you with a decent living wage, indexed for inflation. Plans like Old Age Security, Canada Pension Plan and Quebec Pension Plan can not meet all the retirement income needs of an active senior nor provide the funds for major medical expenses not covered by provincial health plans. The 50 per cent of seniors who qualify for GIS in this country live at or below the poverty line. 

There really is only one conclusion to come to. Maximize your RRSP, to the best of your financial abilities every single year! 

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