The RRSP contributions deadline is coming up fast. And while you may have every good intention of matching or increasing your contribution from last year, it can be difficult and stressful to come up with a significant amount of cash in short order.
Here’s a better plan for next year: a pre-authorized contribution (PAC) program is a great strategy for getting the maximum amount of money into your RRSP eligible investments.
When you PAC, you are simply setting up a regular payment plan — usually an automatic withdrawal from your bank account — in an amount you can afford.
Your investment starts growing right away, meaning it will likely enjoy more growth than if you wait until the end of the year.
Plus, you may benefit from the magic of compounding returns which can produce a larger nest egg than contributing a lump-sum at the RRSP deadline.
A regular PAC becomes part of your budget as a monthly cash outflow that you probably won’t miss and removes the temptation to spend those available dollars for personal consumption.
When markets decline, automatic contributions allow you to purchase more mutual fund shares or units, resulting in a lower average cost over the long term.
Here’s an example of the power of PAC-ing:
You set up a regular investment plan to invest an amount you can afford – say, $250 into your RRSP eligible investments on the first of every month.
At a compound annual return of 6.5 per cent, you’ll have $278,000 of pre-tax assets after 30 years.*
If you wait until the end of each year and invest a lump sum of $3,000 into your RRSP eligible investments (presuming you can up with that large chunk of cash on short notice) you’ll have only $259,100 of pre-tax assets after 30 years.
By PAC-ing each month, you could potentially add $18,900 to your retirement fund – and it doesn’t cost you an extra penny! In addition to the extra long-term tax-deferred appreciation, your contributions also deliver a nice tax benefit for the current tax year.
PAC-ing removes the stress of finding scarce dollars as the RRSP deadline looms and enhances your retirement income opportunities. It’s a good investment strategy and there are many others. Your professional advisor can help you PAC up all your life goals in one sound financial plan.
*The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.
Andy Erickson is division director with Investors Group in Vernon. This column presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances.
