Every year, investors face a timing decision when it comes to contributing to their RRSPs.
When’s the best time to enter the market?
Let’s not talk about timing the market. The AlainGuillot.com blog is not in the business of predicting market movements. We are not in the business of evaluating whether the market is expensive or cheap. We are not in the business of predicting which economic sector will do the best.
Let’s instead talk about creating sustainable and long-lasting saving habits so that, through discipline and consistency, you will have the best retirement for your money.
Assuming you invest every year, these are your choices:
- Waiting until the last minute to make your RRSP contribution
- Contributing steadily over the year
- Front-loading your RRSP
Let’s review these three options and consider which one would be the best for you.
Waiting until the last minute to make a contribution
Every year, many Canadians wait until January/February to make their RRSP contribution for the previous year. The deadline is usually March 1st.
The problem with this approach is that you are forgoing a whole year of seeing your money grow in a tax-deferred environment. If you do the same thing every year, over a long period of time, you could miss out on earning a significant amount of money. Over the lifetime of your investments, that could represent as much as $100,000 or more of forgone earnings.
Another problem with waiting until the last minute is that you might not have enough time to consider all the investment options available to you. You could end up making uninformed decisions not optimal for your situation. Or you might just deposit your money in cash and let it sit there for many months before putting it to work.
In short, I discourage waiting until the last minute.
Contributing steadily over the year
This is one of the easiest and most common investment-timing decisions. You invest a predetermined amount of money on a recurring basis, say $1,000 every month, $500 every 15 days, or even $250 every week.
The math is not complicated. Assume you earned $100,000 last year. That means you can contribute 18% or $18,000. If you divide $18,000 by 12, you have to contribute $1,500 per month. There are all kinds of RRSP calculators that can help you decide the frequency and amount of your contribution.
Every month, when you make your contribution, your dollars start working for you right away and your wealth will increase that much sooner.
This is one of the most popular ways to invest because most people get a regular paycheque, and don’t have chunks of money just waiting to be invested. They invest the money as they receive it from their employers. You can automate the whole process so the money goes directly from your employer to your RRSP.
Front-loading your RRSP
When you receive your notice of assessment, the government will tell you how much you can contribute to your RRSP the following year. Of course, there are a few other factors to consider when thinking about how much you can contribute to an RRSP, but the objective here is to contribute the maximum allowed as soon as you can. The sooner your money is invested, the sooner it can start working for you.
Ideally, you will have the money already in a savings account and all you have to do is to transfer it to your RRSP.
My recommendation: Front-load your RRSP
In general, the stock market goes up. There are a few studies that claim that the stock market goes up 3 out of every 4 years. There are other studies that are more conservative, but I feel confident saying that there is more than a 50% probability that the stock market will go up in any particular year. Considering that the stock market will probably go up more than 50% of the time, we want to be invested as early as possible.
How do you do it?
What’s your strategy? Do you wait until the last minute? Do you contribute steadily over the year? Or do you front-load your RRSP as soon as can? Do share and please say why.
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