Do RSPs still make sense?

For most people they still do. That's the short answer, but it is well worth reviewing your overall retirement strategy and the role that RSPs play in your financial decision-making.

So what are your neighbours doing about RSPs?

It's true that lots of them are shying away from investing in RSPs citing disappointing markets, big mortgage payments and newer TFSA options. Statistics Canada reports that 88% of tax filers were eligible to contribute to an RRSP in 2007, but only 27% actually made contributions. They only used 7% of the total contribution room available to them and there is now almost $500 billion in unused RRSP contributions being carried forward. The median RSP contribution was only $2700.

Some advisors recommend paying down your mortgage before investing in RSPs. I disagree. The problem with this strategy is that with large mortgages and longer amortization periods, by the time the debt is paid off, there is limited time to save for the income needed in retirement.

A paid off mortgage is great, as it means lower expenses in retirement, but you still need income to cover the rest of your retirement expenses. So, unless you plan to sell your home or significantly downsize in retirement, you still need to save and invest.

RSPs still almost always make good sense if:

You are under 50 with 10-15 years left before retirement
You have less than $200K invested in RSPs to date
You are in the highest tax bracket now
You pay less than 6% on your mortgage
You have a balanced portfolio of conservative stocks, bonds and cash investments in your RSP

Here's what I recommend:

Set up a plan to be debt-free before retirement - preferably 5 years before the big day.

Invest monthly in your RSP especially if your income is higher than $40K. If your income is less than $40,000, use a Tax-Free Savings Account (TFSA) instead. You can always move the money to an RSP later if your income increases.

Take the time now to figure out your investment game plan. Decide on the optimal mix of equities, fixed income and cash to meet your specific needs and risk profile. (Note: Figuring out your asset mix is far more important than what investments you actually select. Most people waste time on worrying about finding the "best investment" instead of creating an investment plan.)

If you're a "do it yourself investor", then use low-cost mutual funds or index funds (Hot Tip: Check out Investor's Aid Coop).

Otherwise use an advisor that provides "value-added" financial planning advice. Ask questions to make sure you are getting the advice you are paying for. (check out: Questions to Ask your Financial Advisor).

If you don't feel you can pay down your mortgage and contribute to your RSP, then review your cash flow and reallocate your resources so you can. Sure you might have to give up some good stuff today, but you'll thank me at retirement!

Since most people think twice about withdrawing money from an RSP before retirement, topping up your RSP will help ensure you have some savings when you retire, even if you do have to pay some tax. Just do it!