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RRSP tips for the 30s crowd

The Rolling Stones have been known to sing that "time is on my side." While that's not necessarily the case for 60-something rock 'n' rollers, it is true for the 30-something crowd.

When it comes to investing for retirement, "the earlier you start, the better it is for you," says Tina Di Vito, vice president and national manager of retirement and tax planning at BMO Nesbitt Burns in Toronto. That's because your money grows tax-free in a Registered Retirement Savings Plan (RRSP), and the compounding effect of that over a long period of time really adds up.

Di Vito, a chartered accountant and certified financial planner (CFP), crunched some numbers to prove her point about the advantage of starting early.

Take someone who invests $2,500 annually for 10 years starting at the age of 20 and then stops at 30. The total capital outlay is only $25,000. If that investment earns eight per cent a year, then at age 65, that person's RRSP would be worth $624,575, even though he didn't contribute for 35 years.

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If you wait until you're 30 to start investing $2,500 a year but continue contributing that amount until you're 65, you will invest a total of $90,000. At the same eight per cent return, your RRSP at 65 is worth only $505,176, a difference of more than $119,000.

Di Vito says those who start investing in their 30s are "not out of luck. You still have a long time frame to save for retirement." Even a 39 year old, for example, could still have 25 years to save for retirement.

Kevin Cork, a CFP with The Absolute Group in Calgary, says the three elements of successful investing are money, time and rate of return. The 30-something crowd, he says, "tend to have less money, but they have more time. In the end, having more time is the better asset."

Design a financial plan
Ron Harvey, a CFP with Money Concepts in Ottawa, says the important thing for investors in their 30s is to sit down with a financial adviser and develop a plan.

"The common mistake they make is not starting the plan," he says. "There's always a good reason to wait until next year," but by putting it off, they end up hurting themselves.

Harvey says it's important for 30-somethings not to get anxious about the ups and downs of the market but to stick to their financial plan. The plan isn't static and will change over time to reflect current market activity.

Combat cash conflict
Once you have a plan, you'll know how much to set aside in order to reach your goal. Then it becomes a case of discipline, says Liz Lunney, a portfolio manager at Franklin Templeton Investments in Toronto.

She says at that age, there's a lot of cash conflict, as 30-somethings feel the pressures of saving for a first home, paying down mortgages and starting families. "It can be a challenge for some investors to maintain a maximum contribution," she says.

Lunney says if you can't make your maximum contribution, make a smaller one so you get in the habit of investing. Even investing $100 a month at eight per cent grows to $215,000 over 35 years; bump that up to $350, and it will grows to more than $754,000.

She says as investors in this age category advance in their careers and earn more, they need to add increasingly more money to their monthly contribution.

How to invest your RRSP savings
People in their 30s have a long time horizon ahead of them, so they should invest heavily in equities, Harvey says. However, because this generation grew up through a market cycle that saw the '90s tech bubble turn into the subsequent tech wreck, they might be gun shy.

That's where balanced funds -- which include bonds and fixed-income products -- can help reduce anxiety. He recommends a blend of US and Canadian equities or funds with exposure to balanced funds for the fixed-income component. It's also important to maximize the 30 percent foreign content limit you're allowed to hold in an RRSP, he says.

Di Vito says if you're just starting out and contributing small amounts each month, mutual funds are ideal. You can buy a few units of a fund each month and grow your holdings over time.

Cork, author of "The Investment Book: Angst-Free Strategies for Canadians Under 40," says he generally starts clients off with a conservative portfolio that provides diversified exposure to key assets classes, such as equities, bonds and fixed income, including exposure to small-cap stocks and global funds. "I'll monitor their reaction, and if they get overly excited by things going up or down, I'll scale back that mix."

Keep debt under control
Investing is only half of the equation for the 30-something crowd. Di Vito says people in this age group often have credit card debt and student loans to pay off. She says it's important to eliminate high-interest credit card debt before focusing too heavily on your RRSP.

Mortgages v. RRSP
Chances are good that 30-somethings who own a home carry a large mortgage. Those who have additional funds face the question of whether to pay down their mortgages or invest in their RRSPs. Di Vito says it's possible to do both.

By investing in your RRSP, you generate a tax refund you can then apply to the mortgage. That works well in today's low interest-rate environment, especially when it's plausible to generate an investment return that's a couple of points higher than the interest rate you pay. However, if rates rise, it may make more sense to pay down the mortgage.

Think about your spouse
Lunney says now is also the time to examine how to parcel out your cash flow to maximize the RRSP benefits. If one spouse plans to stay at home to raise kids for a few years, you should consider income-splitting and contributing to a spousal plan. You can read more about spousal RRSPs in Bankrate.ca's article, "The advantages of spousal RRSPS."

Jim Middlemiss is a freelance writer and lawyer based in Toronto. He is a frequent contributor to the National Post, Investment Executive and Wall Street & Technology.

-- Posted: Feb. 9, 2005
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