I was 19 or 20 when I first began contributing to my RRSP. I worked in the private sector for 10 years and took advantage of an employer matching program during the last 5 years while in a senior management position. My contributions were modest, but over time they added up to about $30,000 worth of blue-chip dividend stocks.
Fast forward 2 years later and I have switched careers, moving into the public sector where I contribute nearly 11% of my salary towards a defined benefit pension. I put my RRSP contributions on hold, figuring there was little point adding more to that account when I already contribute so much towards my pension plan.
I haven’t completely ignored my RRSP; my dividend income accumulates in a cash account and when it reaches a certain amount I will add to my existing positions, or purchase a new dividend growth stock. My RRSP has now grown to $40,000 and generates about $1,775 per year in dividends (4.40%). I’m at the point now where I’m wondering, what should I do with my RRSP?
Stay The Course
Financial experts are always preaching the benefits of investing at an early age by showing the chart of 20-year old Johnny contributing a certain amount per year for 10 years and then stopping his contributions, versus 30-year old Sue contributing at a higher rate all the way until she’s 65. Johnny seems to always come out ahead due to the benefits of compounding interest over time.
That’s the approach I’ve been taking with my RRSP. My plan was just to stay the course, not add any new money, re-invest the dividends every so often, and just continue growing the portfolio. Assuming a 6% annual return, my $40,000 RRSP account could be worth $123,000 by the time I turn 50, and could reach $233,000 by the age of 60.
Take A Passive Approach
Since I’m basically ignoring this portfolio for the next 20+ years, perhaps the smarter decision would be to take a true passive approach and simply index my RRSP. I could sell all of my stocks and set-up a low cost, diversified portfolio of ETF’s that covers Canadian, U.S. and international equities, bonds and real estate. Since I love dividends so much, maybe I’d even include a Canadian dividend ETF. Either way, the goal is to set-up a broad portfolio that tries to capture all of the market returns for a low fee.
I wouldn’t actually be ignoring my portfolio with this approach, since I would still be re-balancing to my proper asset allocation each year. Essentially I would be doing the same amount of work with either portfolio, so it comes down to what approach will be the easiest to manage while delivering the best returns.
Start Contributing Again
I’ve put my RRSP contributions on hold because of my new employment situation and large pension contributions. But I still have unused contribution room, plus an additional $2,000 or $3,000 in new contribution room each year. I could start maxing out my RRSP and build this portfolio up to a substantial amount by the time I reach retirement. By having two large portfolios and potential income streams I could have a great opportunity to really live it up in retirement. Of course, this scenario will leave me with a hefty tax burden as well.
The most difficult decision, in my view, is what to do with my RRSP once I get closer to retirement age. My pension income should be relatively high, which means that any RRSP withdrawals will be taxed at the highest rate. We could look at pension income splitting, where I can transfer up to one-half of my pension income to my wife. This income splitting could apply to RRIF withdrawals as well.
The other option that I’ve considered is to retire early and use my bridge benefit (the payment made to pension plan members who retire before age 65 on an early pension) while drawing down my RRSP before I reach 65.
It’s tough to predict what the landscape might look like 20-30 years from now. Tax laws can change, my employment situation may change, and our financial needs as a family may change. When faced with uncertainty, often times it’s best to just wait and see what happens rather than making a rushed decision.
What do you think I should do with my RRSP?