- Why you shouldn’t park money in your RRSP
- How investing can help you get to retirement
- The different ways of investing for retirement
When the annual Registered Retirement Savings Plan (RRSP) contribution deadline draws near, many people put money into an RRSP account and give themselves a big pat on the back for taking action in time to claim the contribution on this year’s tax return.
But a good portion of those people “park” the money. In other words, while they do deposit it into an account that is registered, they don’t invest it in something that could earn them healthy returns. Instead, they tell themselves they’ll make the deposit, get their tax slip and figure out how to invest later.
Problem is, often they never get around to it. They intend to, but life gets in the way. So the money languishes — earning less than one percent perhaps, or maybe nothing at all — for months or years. Does this sound familiar?
Parking your money in an RRSP may not be the best thing for you in the long run. We’re going to show you why and what you can do about it.
Parking money is like getting a parking ticket
One of the advantages of RRSPs is that the interest and investment earnings that accumulate inside the account grow tax-free. Yes, they will be taxable eventually, when you withdraw funds from the account. But you’ll likely be earning less at that point so your marginal tax rate will be lower than it is now, and you’ll pay less tax.
In the meantime, you will have all that time during your working years to save and earn, and to let those earnings compound. And as we know, compounding is one of the strongest forces for creating wealth.
So, when you park money and don’t take advantage of higher earnings over many years, you lose all that compounding power. Instead of creating a force like Niagara Falls, you’ve reduced it to a small waterfall. Nice — but not nearly as powerful.
Now, you might be thinking: So what? At least I’m saving something.
That brings us to another problem — when you park your money, it’s actually getting devalued by inflation. And the longer you leave it in, the less it’s worth. That’s because inflation erodes your purchasing power.
Here’s a simple example. Let’s say you put aside $100 and park it in a non-registered chequing account earning 0% interest. And let’s say the inflation rate is 2%. If you take it out in a year to buy something, the purchasing power of that $100 is actually just $98. In effect you’ve lost $2. Leave it in for 10 years and, assuming inflation stays a consistent 2% per year, you’re left with only $80 in purchasing power. And in 30 years, you can buy just $40 worth of goods.
So parking your money feels like saving but it isn’t really. It’s like leaving your car overnight and coming back to a parking ticket.
TFSAs feel the loss too
Many people use Tax-Free Savings Accounts (TFSAs) to save for retirement, and it’s just as harmful to park your TFSA savings — maybe more so.
Like an RRSP, money in a TFSA can grow tax-free. But when you take money out of a TFSA it isn’t taxed. All the earnings you’ve accumulated over the years are yours to withdraw tax-free.
So if your TFSA is earning little or nothing, you’re throwing away years of tax-free compounding.
Investing your retirement savings is like shifting your money from “Park” into “Drive.” And it’s easier than you might think.
Shifting from Park to Drive
Many people who want to invest in their RRSP or TFSA are thrown into mutual funds. And, while mutual funds have benefits over parking your money, they also come with a hefty price tag which can eat into your retirement savings. This has investors searching for alternatives and discovering a new way to invest for retirement: ETFs (exchange-traded funds).
ETFs have been growing in popularity. And for good reason. They have low fees compared to many other investment options (including mutual funds) while still allowing you to invest in the market.
What exactly is an ETF?
- An ETF is a basket, or collection, of investments, which can include stocks, bonds or commodities.
- An ETF’s holdings can track an index — in other words, the basket has a similar makeup to the index, so its performance should be similar to that index.
- An ETF can be structured in any number of ways — for example, it could hold only Canadian investments, or it could hold a mix of Canadian and international investments, or it could hold only fixed income instruments.
- ETFs are traded on a stock exchange, and the price fluctuates as it is bought and sold.
- Start with an amount you’re comfortable with. The best way to learn is with an amount that isn’t going to get your blood pumping. Over time, as you gain confidence you can add to your portfolio.
- Before you invest, make sure you understand the fees. We keep our self-directed investing fees listed publicly so anyone can see them and make an informed decision on how to invest their money.
- The best way to grow your investment confidence is to learn how to invest. You can learn more about self-directed accounts, and the types of accounts (such as RRSPs) that you can set up by visiting our self-directed accounts page. We’ve got helpful articles and a video on how to make a trade.
Investing in ETFs can be as easy as parking your money
At Questrade, we’ve made it easy for you to invest in ETFs with Questwealth Portfolios™. Each portfolio combines a number of different ETFs into a single investment portfolio.
How do you know which Questwealth Portfolio is right for you? Well, there’s an easy online questionnaire, which asks you questions around your goals and comfort with investing. Then you’re given a recommended portfolio based on the answers you provided. (Learn more about Questwealth Portfolios.)
All Questwealth Portfolios are designed and managed by experts who monitor the market and adjust the portfolio as needed. More importantly, Questwealth Portfolios help you keep more of your money in your investment accounts, with some of the lowest fees you’ll find anywhere. That can make an enormous difference to how much you have at retirement.
TIP: See how much of a difference a Questwealth Portfolio could make to your retirement savings, based on your risk level, time horizon and how much you save. Find out now!
Take more control of your investing
Interested in a more hands-on approach to your investments? With a Questrade self-directed account, it’s easy to trade in stocks, precious metals, bonds, GICS — and yes, ETFs.
Here are a few simple tips to help you get started:
Ready? Set? Invest!
By this point, we hope you’re feeling excited and confident about starting to build retirement wealth by investing. The next step is simple. Open your account today — and start building that big, beautiful retirement fund.
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The information in this blog is for informational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.
The Questwealth Portfolios example is not indicative of future values or the performance of any Questwealth Portfolios client or model portfolio. Actual results may vary.