Retirement savings the best investment
By Graham Barber

There's no getting around the fact that real estate is hot. From buying a first home or condo, to trading up, to home renovations, Canadians are embracing real estate in a big way. In fact, anecdotal evidence and recent news items suggest that Canadians are turning to real estate as an investment class, sometimes at the expense of their registered Retirement

Savings Plans (RSPs).

Younger Canadians in particular have embraced the idea of building equity in a home.

We all probably know someone like Jessica, a 30- year-old marketing professional, who sees her condo not only as a place to live, but also as a financial asset.

Now, for most of us, our homes are indeed our most important investment.

But this does not mean that we should forget about our retirement savings - on the contrary. An RSP is a powerful financial tool that can provide you with the freedom and flexibility to pursue your goals throughout your life.

Why contribute to an RSP?

At 30, retirement probably seems a long way off to Jessica.

It makes sense that she would want to pay off her mortgage as quickly as possible. After all, her condo represents her most significant investment, and the mortgage on it her largest debt.

Jessica realizes this and has done a good job in reducing her mortgage principal. Over the life of the mortgage, this can significantly reduce interest costs.

But unlike her parents, Jessica will probably have five or six different jobs over the course of her career.

Along with this freedom comes the responsibility of providing for her financial well-being - today and down the road.

Why contribute to an RSP?

At her present job with a small marketing company, Jessica does not have a company pension plan - a situation that many of us face. This makes it all the more important for her to build her retirement savings.

Long-term growth.

Although her retirement may seem a long way off, now is actually the best time for Jessica to build her retirement savings. The sooner she invests, the more time her money can grow and help provide for a comfortable retirement. What's more, the money earned in her plan

compounds tax-free.

Tax savings.

Contributing to an RSP gives you one of the best tax breaks available. Jessica is in the 30 per cent tax bracket. A one-time contribution of $5,000 could give her a tax refund of $1,500. In other words, her $5,000 can grow tax-free at a cost to her of only $3,500.

Liquidity.

If Jessica were ever to face difficult financial straits, such as a layoff or termination (which would lead to lower taxable income), she could always withdraw some of the money in her plan to tide her over.

Her investment in her condo is not so liquid. Likewise, if she ever wanted to return to school and needed some money to help fund her education, she could draw on her retirement savings through the Lifelong Learning Plan (LLP), which would allow her to borrow from her RSP savings interest-free.

Did you know?

Under the RSP Home Buyers' Plan, you can borrow up to $20,000 from your RSP and use it toward a down payment on a first home or condo. In effect, you can borrow from yourself - interest-free and tax-free.

Diversification.

Having a diversified mix of assets can help protect us from downturns in any one asset class. This is the idea behind diversification. You've probably heard it expressed in the adage, "Don't put all your eggs in one basket." However, many of us think of diversification only in the context of our investments. In fact, it should apply to our total wealth. Consider Jessica's case - tying up all her money in her condo would leave her exposed to the whims of the housing market.

A financial advisor can help Jessica determine how much equity she has in her home, and help her decide where to direct any new savings.

Get the best of both worlds.

Jessica has good financial sense. She has diligently saved to furnish her condo, and has worked hard to pay down her mortgage debt. But she needs to start building her retirement savings. Fortunately, there are ways that Jessica can continue to cut away at her mortgage and build her RSP at the same time. Here are a few strategies she might want to consider.

Put her tax refund to use. One way for Jessica to do both is to make her RSP contribution each year and use the resulting tax refund to pay down her mortgage. In her 30% tax bracket, a $4,000 RSP contribution would generate a refund of $1,200, which she could then apply towards the principal on her mortgage.

Boost her RSP with a loan. In today's low interest rate environment, Jessica should also consider taking out a loan or line of credit and using the money to catch up on her RSP contributions.

If the interest rate on her mortgage is higher than the rate she could get on a personal loan, she could also use part of the loan to pay down her mortgage (most lenders allow you to make an annual, lump sum payment on your mortgage principal).

Consider regular RSP contributions.

Another alternative for Jessica to explore is a regular investment plan, where money is automatically deducted from her bank account and directed to the RSP investment of her choice. Regular investing is an easy way for Jessica to ensure that her

retirement savings maintain their priority.