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Money Management Newsletter - February 1995 Some investors only look at the short-term tax break that an RRSP can provide. The smart investor, on the other hand, also sees the
long-term benefits of accumulating assets in a tax-sheltered
plan. Investing in an RRSP over a long period of time makes
sense. The longer the money stays sheltered from taxes, the greater the
earning
power of your investment. How many investments allow you to do that? Consider what an RRSP can do for you. Suppose you contribute
$1,000 each January to your RRSP for the next 30 years and earn an average
10 per cent compounded annually. In 30 years, your investment would have
accumulated to about $180,000. At 12 per cent, your investment would be
worth about $270,000. Had you invested outside of an RRSP, your nest-egg would
be worth much less. Your $1,000 per year principal invested at 10 per
cent compounded annually would accumulate to only about $84,000 after
tax - assuming a 40% tax rate. Even if your average rate of return was
12 per cent, you would only accumulate about $105,000, assuming the same
tax rate. There's a reason for the dramatic difference. At a 40
per cent tax bracket, your 10 per cent return is, in reality, only 6 per
cent because of the fact that on every dollar of interest you earn, 40
cents is paid out in tax. Taxation of the RRSP investment is deferred
until the money is withdrawn and this permits much greater accumulation. The strength of the RRSP is in its compounding effect
over long periods of time. Coupled with a high rate
of return, a tax
sheltered investment such as an RRSP will play a major role in guaranteeing
that investors have enough savings to support their financial needs during
retirement. When considering an RRSP, smart investors will ensure
they have a mix of both growth and fixed return products. The proportionate
mix will vary with the age, risk tolerance and portfolio return objectives
of each investor. Investors seeking long term growth and superior returns
for their RRSP should consider equity mutual
funds. These funds are professionally managed, diversified
and liquid and while it is almost impossible to predict the performance
of equity
funds, they have historically performed far better over the long term
than more conservative investments. We have charts that demonstrate the value of saving
as much as you can at a high rate of return over a long period of time,
such as 30 years. Obviously, the sooner you begin investing in an
RRSP, the better. Talk to your Fiscal Agents
financial planner today to find a product that meets your financial
needs and goals.
Have a question regarding this article? Use our feedback form to send us a note. © , Fiscal Agents Money Management Newsletter
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