Ever wondered what the Registered Retirement Savings Plan (RRSP) of millionaire retirees looks like? One common thing is they are in the investing game for a long time and don’t bother timing the stock market. It is impossible to predict how markets will do in any given year. They only look at the company’s growth strategy and fundamentals. Then, they wait for the market to panic and sell the stocks of those companies so they can buy the shares at a cheaper price.
Three things about RRSP every millionaire retiree knows
There are three stages of investing – entry, holding period, and exit. Smart investors use the tax benefit of the RRSP efficiently in these stages.
Make RRSP contributions by looking at your taxable income
Entry: You can deduct your RRSP contributions from your taxable income. Smart investors max out on their contributions in high-income years and contribute less in low-income years. You can even carry forward this contribution room and save it for a high-income year.
You invested in an RRSP to save on taxes, but none of your preferred stock is trading low. The market is bullish, and all stocks are overvalued. Find a low-volatility dividend stock whose price remains relatively the same and gives good dividend yields. It can be a good stock to park your funds in and let your investments grow with inflation till your stock enters the bear zone.
One such evergreen stock is Enbridge (TSX:ENB), which gives a 6% average dividend yield. Its low-risk business model and predictable cash flow keep the stock in the $40-$55 range. It also grows its dividend annually by 3%, growing your money with inflation.
Rebalancing your RRSP portfolio through the holding period
Holding period: Since you are investing in an RRSP, you can reinvest the dividend amount to buy more shares of Enbridge or some other stock, compounding your returns tax-free.
Suppose you invest $5,000 and buy 103 shares of Enbridge for $48.50/share. You can get $377 in dividends towards the end of the year in four equal installments. You can hold onto this $377 and buy the long-term growth stock in your watchlist when it falls to your price point.
For instance, BlackBerry (TSX:BB) stock is at its 20-year low amid business restructuring. The stock that traded at $8 to $12 and sustained this price comfortably is trading below $3.50. There are reasons as the market is bearish, investors are looking for profits, and the declining revenues and cash reserves aren’t helping.
The stock could surge to $8 to $12 for three reasons. First, if it unlocks the $640 million in royalty revenue. Second, it signs long-pending government cybersecurity contracts. And third is the internet-of-things proliferation from the 5G ecosystem. If everything else fails, BlackBerry can opt to sell its products and patents at a premium to interested buyers. Even that can boost the share price. The next 10 years of holding could generate remarkable returns for BlackBerry investors.
Planning your RRSP withdrawals
The Exit: This is the trickiest part of investing in an RRSP. The withdrawals are taxable. Plan your RRSP withdrawals based on your taxable income and not on the stock market.
There is a famous quote from John Lennon, “Everything will be okay in the end. If it’s not okay, it’s not the end.” Some of your stocks will make profits, and some might make losses. The end objective is for profits to make up for the losses and grow your overall portfolio.
And if you invest in a dip, your losses will be minimal. If you invested in the S&P 500 Index ETF in the 2007 dip, you were still 400% positive in the October 2023 dip or 260% positive in the March 2020 pandemic dip. We are not here to time the market, but we are here to spend time in the market.
The whole point is to have some cash handy in your RRSP, maybe save it in a term deposit. When the time comes and the market crashes, you can take out some of your savings and pick the cherries.
