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Three Criteria for Evaluating an RSP
Rate of return
Thanks to the power of long-term compounding, even a small increase in average return can have a dramatic impact on your retirement accumulation. Suppose you are 30 years from retirement and contribute $5,000 annually to your RSP. If you average 6% in yearly growth, you’ll accumulate $419,008. If you average 7%, you’ll accumulate $505,365. That one percentage point difference in performance yields 21% more.
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Growth of a $5,000 Annual RSP Contribution Made at the Beginning of the Year
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Rate of return
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Number
of years
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4%
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5%
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6%
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7%
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8%
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9%
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10
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$62,432
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$66,034
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$69,858
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$73,918
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$78,227
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$82,801
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20
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154,846
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173,596
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194,964
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219,326
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247,115
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278,823
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25
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216,559
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250,567
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290,872
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338,382
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394,772
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461,620
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30
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291,642
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348,804
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419,008
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505,365
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611,729
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742,876
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35
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382,992
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474,182
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590,604
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739,567
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930,511
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1,175,624
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Capital protection
One of the surest ways to build wealth over time is to minimize investment losses, even if that means sacrificing some upside potential. Check the table on page 11; if overly speculative investing wipes out 50% of your RSP, you will have to make 100% on the remaining assets just to break even. Determining your own risk/return ratio involves a compromise between maximizing returns and protecting capital. Don’t be too daring, or too cautious. Prudently consider the alternatives and ask your Investment Advisor to recommend those vehicles that best suit your temperament and financial situation.
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Capital Protection:
Evaluating the Cost of Speculative Investing
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Percentage loss
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Return required (%)
to break even
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10%
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11%
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30%
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43%
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50%
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100%
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60%
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150%
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80%
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400%
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100%
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-
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Flexibility
It’s best to adopt a portfolio approach for your retirement savings, holding a variety of investment vehicles to balance your exposure to inflation and market risk. As well, your investment emphasis should shift through your financial life cycle, from growth to capital protection and, ultimately, income. Flexibility means having the control and choice to make these shifts at appropriate times.
It can be dangerous to be locked into
only one type of investment vehicle.
Think back to 1981 when that year’s
Canada Savings Bonds were issued
at 19.5%. How would you have felt
if all of your money was tied up in
GICs at 9%?
Conversely, high-yielding short-term
investments can create a false sense
of security. Average yields on short-term
Government of Canada bonds averaged
about 11% during the 1980s, and
people who counted on that continuing
were shocked when rates plunged
over the next 15 years, and short-term
bond average yields fell to around 4%.
That’s like getting a 60% pay cut. The
same is true of equities. Since 1970,
annual returns on Canadian common
stocks, as measured by the S&P/TSX
Index, have ranged from - 26% to + 45%.
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