 |
By Jonathan Chevreau
National Post
Saturday, February 03, 2007 |
Theoretically, there should be no annual RRSP season. For decades, the nation's banks and mutual fund companies have aggressively promoted regular savings programs that emphasize year-round contributions to RRSPs.
Adrian Mastracci, fee-only portfolio manager at
KCM Wealth Management in Vancouver, says,
"The big push is still February."
Ideally, from the industry's point of view, every adult investor in the land would be maximizing their RRSPs through monthly pre-authorized chequing (PAC) plans.
This approach is what American broker and bestselling author David Bach calls the Automatic Millionaire route to wealth.
Of course, human nature being what it is, the realities are:
- few people maximize their RRSP contributions;
- even fewer have PAC plans to automate their ascension to wealth.
The result is the usual two month crunch in January and February, culminating in a last minute orgy of contributions. You've probably been in one of those bank lineups on the last day of February or, as is the case this year, March 1.
"The big push is still February," says Vancouver advisor Adrian Mastracci. "In January, people are still waiting to pay the bills from December."
Toronto advisor Warren Baldwin says RRSP season still exists for banks and other financial institutions. "Anyone I speak with in the mutual fund industry says RRSP season is a very very busy time."
Patricia Lovett-Reid, senior vice-president with TD Waterhouse, says more people are contributing throughout the year but the RRSP deadline is "still a motivator to focus on their investments and think about their financial goals."
Of course, the driving motivation behind most last-minute contributions is seldom more than the desire to lower taxable income for the previous calendar year.
The problem is that RRSP limits have grown sufficiently large that it's a rare investor who can come up with the total lump sum required to maximize contributions these days. For those without employer-sponsored pension plans who earn $105,000 a year, the maximum for 2006 is $18,000. For 2007, it's a whopping $19,000: Early birds can get a year ahead and contribute that now rather than waiting until February, 2008.
The sane way to handle RRSP planning is to make 12 easy payments of $1,583 a month. PACs are simple to set up. Walk into your local bank branch or financial- planning office, hand them a signed and voided cheque for the monthly (or quarterly) amount you wish to save and -- presto -- money will swoosh automatically from your bank account to the financial institution in question. This will happen year after year until you're either rich, dead or you suspend the program.
"A form of PAC or forced savings is the least painful and makes sure the contribution is not somehow overlooked," Mr. Baldwin says.
Naturally, the financial institutions love this approach, since it means they're building up "assets under management" painlessly. While their customers strive to become automatic millionaires, the banks' hope is that if thousands of other customers follow that route, they will become automatic billionaires.
From the investor's vantage point, the idea is that once you get used to having less of your paycheque to spend, you'll "never miss" the difference. And this is quite true: In our family, the only PAC we have in place is a $333-a-month plan to fund our daughter's registered education savings plan. After nearly a decade, this has become quite a tidy sum and we've never really noticed the missing $333.
But there is also an investment advantage to this method, apart from the practical matter of forced regular savings. A lump sum paid once a year runs the risk of putting all your money into an investment at the top of a cycle. By "dollar cost averaging" monthly, you can pick up units of a mutual fund more cheaply should markets subsequently fall. Of course, if the markets soar upwards, as they did in 2006, you'll wish you'd put in one lump payment right from the start. Four weeks to go!
|
