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Why last-minute contributions are the worst way to save

Decisions about your RRSP contribution made at the last minute are bound to be poor ones.

Les Cunliffe

February is the month that most of us pay attention, belatedly, to our RRSPs and decide how much, if anything, we should be parking in the retirement tax shelter.

This inattention and procrastination have turned February into a banking industry bonanza and made the month a headache for financial advisers who at best say, "Better late than never" when clients start calling.

"They scramble to find money, usually in lump sums at the last minute, and get it done. That is the culture of RRSP season that I struggle to break," says Kurt Rosentreter, a certified financial planner and chartered accountant with Manulife Securities Inc. in Toronto.

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The adviser ticks off numerous reasons why the last-minute approach is the worst way to save – other than missing out on the tax-sheltering benefits of RRSPs altogether. His issues with 11th-hour contributions fall under two categories: funding and investing.

By contributing just under the wire, people lose a full year's worth of tax deferral benefits, he said.

From a funding perspective, the end-of-year approach is painful as investors look for a large chunk of change that either has to come out of savings or in the form of loans that carry interest that is not tax deductible. It's far better and less stressful, experts say, to work out a monthly contribution plan that spreads the bite over the year and comes out of a regular paycheque.

Investors will also benefit from examining their RRSP contributions more often than once a year.

"If you are in the habit of having an investment plan where it is really a once-a-year sit down and nothing else, I would say that is insufficient," said Mr. Rosentreter. "Particularly if you match it up with a high-cost product solution," such as paying Cadillac prices for Volkswagen service, he says.

Mr. Rosentreter encourages investors to create a relationship with their advisers that goes beyond multiple meetings. "A greater level of accountability and a focus on value pricing and regular profit taking and rebalancing back to your plan are all just core steps of any portfolio that have been proven successful in the past. You have got to do that more than once a year."

At least one industry observer, however, thinks it might not be such a bad thing for people to worry less about their RRSP – as long as they are contributing to it, that is.

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"I would strongly suggest that most investors would not be better off to focus on their RRSPs more than once a year," said Talbot Stevens, a financial author and industry consultant based in London, Ont.

His "leave it alone" approach to RRSPs comes with the belief that it is human nature to be most bullish when markets are nearing their peaks and most pessimistic at bottoms when a bounce-back is all but inevitable. "Even inside RRSPs we are going to buy high and sell low; it is just hardwired into our brains."

There is perhaps one exception to the once-a-year meeting, he says, and that is to "take advantage of rare, significant buying opportunities."

Think back to the depths the markets plumbed in late 2008 and early 2009 when burned investors had all but sworn off equity investing. As rare as those 40 per cent TSX declines sound, they have in fact happened twice in the past decade, Mr. Stevens points out, and market statistics show that those drops lead to dramatic returns. "If the market is down 20 per cent or worse, the one-year average going forward total return on the TSX is 28.3 per cent."

Sterling Rempel, a certified financial planner and owner of Future Values Estate & Financial Planning of Calgary, has come up with a term to describe the phenomenon of investors focusing on the latest trend or worry.

"When I am speaking with clients right now, often their investment decisions have less to do with the long-term plans that we have set up for them and the asset allocations and more of a 'recency bias,' he said. "That is, they are making new investments based on whether the market has been up or down either after their last statement or they have heard something on the radio. When you are making decisions based on the headlines it is rarely a good outcome."

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Mr. Rempel would like to see his clients more often than once a year to speak about rebalancing their portfolios, if nothing else. That stems from last year's bull market in bonds and a down market for equities which, in many cases, has thrown clients' asset allocations out of whack. "Does it make sense to rebalance their portfolio to take some of the profits from the high of bonds and move them to the low of stocks?" he said. Typically, that sort of decision requires a meeting of client and adviser.

He also urges his clients to make frequent and regular RRSP contributions through the year, rather than a large lump sum. Not only is that approach easier on cash flow, but it reduces the risk of so-called market timing, or the chance that investors are buying securities at the top of the market.

Because he is based in cattle country, he often uses the homespun analogy of cattle buying with clients to make his point. "If you buy them on a monthly basis, sometimes you are going to be buying more cows and sometimes you are going to be buying less, but when you get to retirement you have got a corral full of cows."

Special to The Globe and Mail

For tips, stories, videos and live chats ahead of this year's RRSP contribution deadline, check the Globe Investor 2012 RRSP season section for daily updates.

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