Every year, financial advisors get asked the same question: Do RRSPs get good returns? Or, more simply, do RRSPs gain interest? 

Well, the quick answer is, it depends.

Asking if RRSPs get good returns is really like asking “Are cars fast”? The answer isn’t really about the car (RRSP in this case), but what’s inside of it. 

Let’s break this car analogy down a bit more…

So, if your car is an RRSP, what makes it fast (or effective) is the engine. The engine of an RRSP can be made up of MANY different financial products (components), like mutual funds, ETFs, stocks, bonds, or good old fashioned savings accounts. The unique mixture of these components is what will determine the performance of your RRSP: whether it will be fast or slow, effective for growth or low-risk and steady. 

Before we get into how to choose the right engine for you, you might be wondering: what exactly is an RRSP? 

An RRSP or Registered Retirement Savings Plan (also known as an RSP before it is registered), is a type of account specifically designed for your retirement savings. It differs from other investment vehicles like Tax-Free Savings Accounts (TFSAs) or non-registered investment accounts in the way it treats tax and what it's used for. 

While TFSAs offer tax-free growth and withdrawals, RRSPs defer taxes until retirement, when your income is likely to be lower. This can make RRSPs an attractive option for long-term retirement savings.

So how do you choose the right engine for you? 

Choosing the right components for your RRSP boils down to 3 considerations: time, risk tolerance, and your investment knowledge (spoiler: these are the same 3 considerations you should be thinking about with ANY investment). 

In this article, we’ll break down these three considerations, so that you feel confident that you understand what ‘engine’ might be right for you before your next trip to the car dealership. 

1. Time

The timeline you have to invest your money is the MOST important consideration. The less time you have until your goal (e.g., retirement), the less risk you’ll probably want to take in selecting your investment.  

Consider Jenny, a 30-year old graphic designer with a passion for travel. She has time on her side with a 30+ year horizon before she retires. Therefore, she might be able to choose an RRSP with higher risk components. Time is essentially her ally in smoothing out the bumps of the market. Time acts as a buffer, allowing for recovery from market downturns, much like a long road trip where occasional detours are manageable.

Investments like mutual funds and ETFs tend to be very unpredictable over a short period (say, less than 5 years). Over longer periods, such as 10 to 20+ years, they tend to provide more stable returns. Note that these returns are NEVER GUARANTEED, even over very long time horizons. 

2. Risk Tolerance

What if I asked you how you would feel if your investor came to you and told you your investments went down 20%? How about 30%? Or even 40%? Your reaction to these scenarios is a gauge of your risk tolerance. Did your stomach curdle, or drop to your feet? Did you have a sudden urge to sell everything and go back to stuffing cash under your mattress again? Or would you shrug and just carry on with life? If the former, you may have a lower risk tolerance. If the latter, you may have a higher risk tolerance. 

Bob is a 50-year old car repair shop manager who’s approaching retirement. He breaks a sweat at the mere thought of market dips. Bob’s risk tolerance is very low, and he has little time on his side. The “engine” of his RRSP should be built like an old Toyota Sienna minivan: It may be slow and it may not be flashy, but hey, it's sturdy and will get you where you need to go. Bob’s engine isn’t going to take him drag racing anytime soon, but it serves his purposes. He might lean towards an RRSP composed of bonds or GICs.  

One last thing to note on risk: 

Risk is sometimes confused for volatility, but they're not really the same thing. While risk is the likelihood that something bad happens (e.g., you lose money), volatility refers to how much a value (or your money) goes up and down over time. If you’re new to finance, the most important thing to know is: Bigger ups and downs MAY lead to bigger POTENTIAL returns over longer periods of time. 

3. Investment knowledge

If an RRSP is your car’s engine, then investment knowledge is your driver’s licence. Investment knowledge is important because it gives you the information you need to operate your vehicle (RRSP) and what to expect from the engine (how much time they need, risk/volatility, etc.). For example, if you experience big swings in the market (volatility) and come out stronger, if you have investment knowledge, you have a better chance of sticking to your original plan (keeping your money in the investment) when big swings happen. 

Meet Sarah, a seasoned investor who’s seen it all. She knows that the market operates in cycles, ups and downs, and that pulling money out of an investment during a downturn is not always the best strategy. She weathered the 2008 financial crisis by choosing to keep ‘driving’ her old RRSP, instead of deciding she’s reverting to the horse and buggy. On the other hand, Tim, a newbie to investing, still has his ‘learners permit’. For him, staying the course during a downturn may be harder. For beginners, it’s advisable to start with more straightforward, conservative, lower-risk investments to the build confidence and understanding needed to make it out of the ‘parking lot’. 

Just like you wouldn’t bring a Toyota Corolla to a Formula 1 race, the types of investments you choose should align with your timeline, risk tolerance, and investment knowledge. Starting with less complex options like mutual funds and ETFs is often a good strategy for those new to investing (Tip: you don't need derivatives or options). See how you feel when your own investments fluctuate before buying the ferrari. 

If you’re just not feeling confident enough to take that first drive, you might consider consulting a good financial advisor. They should take the time to make sure you fully understand exactly what’s under the hood of your tailored RRSP, before you take off.