RRSPs: What Should You Put in Them?

The road leading to a goal does not separate you from the destination; it is essentially a part of it.

~ Charles DeLint

• Basic: These are usually provided through an advisor affiliated with a mutual fund dealer or bank who offers advice on where to invest your money.
• Self-Directed: These are plans, usually through discount brokerages, where you choose where to invest your money.
• Spousal: One spouse contributes money to an RRSP for the other. The contributing spouse gets the tax break, but the money belongs to the other spouse. In case of divorce, the assets are divided between the spouses just as any others would be.
• Group: You may have access to a group RRSP plan through your employer. Some employers will match your contributions up to a certain limit. Your choice of investments depends on the specifics of your plan. Make sure you understand the details of your group plan and figure out how it fits in with your overall investment and retirement strategy.

Where Can You Get Them?

1. Banks & Trust Companies: You can open an RRSP at any of the big banks or trust companies and they will usually provide you with some advice on how to invest your savings. Be careful, however, if you notice that all of the investments they recommend are affiliated with their bank.
2. Brokerages: You can opt for a full service or discount brokerage, and most of the big banks offer discount brokerage services as well. Each year the Globe and Mail releases a list of discount brokerage rankings. Your choice will depend on your level of investment knowledge and the way in which you want to allocate and manage your money. If you go with a discount broker rather than a full service outfit, you will likely be choosing a self-directed RRSP.
3. Financial Advisor: Often advisors are affiliated with a mutual fund dealer and as such will only recommend mutual funds for your RRSP. While this may be a good strategy for you, be aware that you have many other alternatives, some of which may be more appropriate for you. If your advisor isn’t willing to explain them to you, you may want to find a new one.
4. Credit Unions: If you belong to a credit union, check out the types of RRSP products that they offer. These may include RRSP savings accounts, GICs, mutual funds, and more.
5. Insurance Companies: Many insurance companies offer RRSPs as part of an overall financial plan. They may offer GICs and mutual funds, but most specialize in annuities.

What Can You Put in Them?

1. Savings Accounts: If you want the lowest risk, most liquid place to park your RRSP cash, this is the ticket. The only catch is that, while your deposits will likely be CDIC protected up to $100000, you will earn very little interest on your deposits as long as rates remain low as they are now. Some of the banks that offer higher interest savings accounts (like Ally and Canadian Tire Financial) do not offer RRSP versions of their savings accounts. ING Direct and PC Financial do offer high interest savings accounts under the RRSP umbrella, but ING Direct currently has the better rates.
2. GICs: Guaranteed Investment Certificates are also safe, CDIC protected places to invest your RRSP money. They are available in terms that generally range from 90 days to 5 years. You can find shorter or longer terms, but these are the most common ones out there. Usually, the longer you lock up your money, the higher the interest rate you’ll receive. Right now, ING Direct is offering a 3% rate on a 90 Day GIC. This is a great deal, as the 5 year GIC is only paying 3% as well. (Note: I have no affiliation with ING Direct right now. I’m just a satisfied customer.)
3. Mutual Funds: Mutual funds are groups of equities or bonds (or both) that you can purchase in the form of units. You can usually sign up for monthly contributions or add lump sums to your investment as you like. Beware of fees with these products. Make sure you understand exactly what you are paying for the fund and to your advisor, if you’re using one.
4. ETFs: These are like mutual funds, only they are usually associated with much lower fees and are more often available through discount brokers rather than advisors.
5. Stocks: You can include the stocks of individual companies in your RRSP if you use a full service or discount broker.
6. Bonds: You can buy individual government or corporate bonds through a broker. You can also invest in bonds through mutual funds or ETFs that may represent a variety of bonds linked to a bond index. You can concentrate on corporate or government bond indices individually, or you can buy an ETF or mutual fund that contains a mixture of both.
7. Options: Options are investment vehicles that are derived from stocks or other financial instruments. They are fairly complicated for the average person and I don’t have enough knowledge in this area to give you a great deal of detail on them. They are, however, RRSP eligible. Still, unless you really know what you’re doing, leave them to the experts.
8. Your Mortgage: Yes, you can technically hold your own mortgage inside your RRSP. I have read a little about this, and it is usually not recommended, except in a few specific circumstances. It seems pretty complicated and I would again caution against swimming in the deep end of the pool unless you really know what you’re doing.

What Should You Put in Them?

The answer to this question will depend on your unique situation. Generally, your asset allocation will depend on your risk tolerance. The higher your risk tolerance, the larger your concentration on stocks, or mutual funds and ETFs that contain stocks. Bonds are less risky, but not risk-free. GICs and savings accounts contain the least risk. Here are some factors to consider:

• Age: Your age will usually determine your retirement time horizon (unless you are a 28 year old whiz kid who is already independently wealthy). Generally, your time horizon will determine how much risk you are able to take in your investments. As you get closer to retirement, you should own fewer stocks, more bonds, more GICs and perhaps a high interest savings account. If you are 10 to 20 years or more from retirement, you can afford to take a little more risk if you like.
• Your Other Investments: What other assets do you own? A home? Non-registered stocks, bonds, etc.? You need to make sure you are diversified across all areas of your financial life both inside and outside your RRSP.
• Your Unique Personal Situation: Your marital status, the number of children you have, your income level, job stability, and health status are just a few of the factors that might affect how and where you allocate your RRSP dollars. The more risk in your personal situation, the less risk you should take in your investments.
• Your Personality: Some people like to take more risks. This can spread to their investments as well and there is nothing wrong with that, so long as they are fully aware of and OK with the level of risk to which they are exposed. Knowledge is power. Always know the maximum that you can lose.

This is meant to be a discussion of RRSPs at a very basic level and it is far from complete. Still, I hope it has you thinking about your retirement plans and how you want to handle them.

What’s your RRSP strategy? How do you decide where to allocate your assets?