Last minute RRSP contributions aren't a good idea

I will be making my RRSP contribution just a few days before next week's deadline and I’m not proud of that.

In my 20s, I socked away $350 per month into my Registered Retirement Savings Plan and topped up my contribution prior to the annual February deadline. I haven't been able to to do that in the past few years, but I hope to get back to monthly contributions next year when my finances are a little steadier.

Related: How $100 a month can make you a millionaire

I will start with a small, affordable amount and time it to come out of my account on the same day I get paid. It’s unlikely that I will ever miss the money, and this will help me build up my retirement savings.

This is a better way to save because contributing smaller amounts through the year is likely to have less impact on your lifestyle. It also gives you more time to take advantage of compounding and dollar-cost averaging if you are buying stocks or mutual funds. Because you're buying throughout the year, some at higher prices and some lower you get  better average price.

By contrast, the trouble with last-minute contributions is that you may miss the deadline, or misjudge the amount you can contribute if you don't pay attention to your notice of assessment from the Canada Revenue Agency. Too often, people just decide to skip it altogether and push back saving for another year.

TD Canada Trust points out that if you invest $100 per month for 40 years, you can accumulate more than twice as much as someone who starts investing later and then tries to catch up by contributing twice as much for 20 years.

If you start when you are 25 and contribute $100 a month for 40 years, at age 65 you will have roughly $199,149, assuming a constant 6 per cent annual rate of return, according to TD.

If you start at age 45 and contribute $200 per month, you would have $92,408 at age 65, given the same rate of return.

Related: Save more for retirement, youth told

Apparently I’m not the only last minute RRSPer out there.

About one-in-four eligible Canadians are still planning to make a contribution, according to a poll conducted in mid-February by Harris/Decima on behalf of the Canadian Imperial Bank of Commerce. Half of these folks say they will likely wait until the last couple of days before the deadline.

Those between the ages of 25 to 44 are among the most likely to procrastinate.  

A separate poll by TD Canada Trust found that of those who make their contributions at the last minute, nearly half say it’s because they feel they don’t have enough to contribute throughout the year.

“People think a few dollars a week won’t make a difference,” said Cynthia Caskey, vice president, portfolio manager at TD Waterhouse Private Investment Advice.

“But don’t discount the effects of even a small amount being put aside every month.”

 Caskey likes to use a fitness analogy here. “You can’t just suddenly show up to high impact aerobics class and expect to run for an hour and really feel your best coming out of that. It’s better to work up it with walking 20 minutes a day,” she said.

Similarly, you can work a pay-yourself-first plan into your lifestyle. “You need to have a balance between enjoying your life now and making smart choices about where your savings will be in the future,” Caskey said.

Also read:

Saving: 10 things you need to know

Automatic plans make saving easier