How to Build a Diversified RRSP Portfolio With Just $10,000?

Here’s why RRSP investors can consider allocating a major portion of their income towards index funds such as the VSP.

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An RRSP, or Registered Retirement Savings Plan, is an investing and savings account that helps you grow your money with significant tax benefits. You can contribute 18% of your taxable income up to $31,560 and lower your tax liability in the process.

For instance, an individual earning $100,000 each year can contribute $18,000 to the RRSP, reducing the taxable income to $82,000. As the RRSP is a retirement account, the contributions are taxed on withdrawals. Generally, you withdraw the RRSP money in retirement, which will be taxed at a lower rate.

You can hold a number of qualified investments in the registered account, which includes stocks, mutual funds, ETFs (exchange-traded funds), and bonds. As the RRSP is a retirement fund, investors may allocate a higher portion of their investments towards inflation-beating asset classes, such as equities, while enjoying compounded returns over time.

You can open an RRSP account at several financial institutions, such as banks, trusts, insurance companies, and credit unions.

What is the average RRSP savings amount?

Economic headwinds such as inflation and higher interest rates in the last two years have made it difficult for Canadians to contribute towards the RRSP. According to a report from Bank of Montreal, the average amount held in the RRSP fell by 28% year over year to $113,070 in 2023 from $144,613 in 2022. Comparatively, the average RRSP balance stood at $101,155 in 2018.

So, while the interest rates and inflation have impacted Canadians since 2022, total account holdings are in line with historical averages, with a sizeable increase in retirement savings between 2020 and 2021.

Where should RRSP investors allocate $10,000 each year?

Younger RRSP holders can consider investing in a diversified portfolio of stocks as they have a long-term horizon. An easy way to gain exposure to a quality basket of stocks is by investing in indexes such as the S&P 500.

Over the last six decades, the S&P 500 index has returned around 10% annually after adjusting for dividends. After entering bear market territory in 2022, the S&P 500 index has soared close to 27% in the last year and trades close to all-time highs. The S&P 500 index offers you exposure to some of the largest companies in the world, such as Apple, Microsoft, and Nvidia.

In the last 30 years, the S&P 500 index has returned 1,800% to shareholders after adjusting for dividend reinvestments. So, a $10,000 investment in the index back in 1994 would be worth $189,000 today.

While past returns don’t matter much to current and future investors, the S&P 500 is positioned to deliver inflation-beating returns in the upcoming decade as well.

Canadian investors can gain exposure to the S&P 500 index by investing in Vanguard S&P 500 Index ETF (TSX:VSP). With $2.98 billion in assets under management, the VSP exchange-traded fund (ETF) is also hedged to the Canadian dollar, shielding investors from fluctuations in interest rates.

The ETF has a management fee of 0.08% and an expense ratio of 0.09%, which is quite low. It means you will pay $17 in annual fees for every $10,000 invested in the fund. Additionally, the S&P 500 index pays you a dividend yield of 1.15%. So, an investment of $10,000 in the diversified index fund will help you earn $115 in annual dividends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.

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