Rates of return

Q – I’m in the process of reading Gordon Pape’s 2002 Buyers Guide to RRSPs. In determining the value of a RRSP at maturity, the book talks about the projected annual rate of return. I am unclear as to what this means. Is it like an interest payment every month? If you could clarify this it would be greatly appreciated. – L.T.

A – The projected average annual rate of return is simply how much you think your invested savings will earn each year over time. You have to decide what is reasonable, based on how the money is invested.

If the money is to be invested in a fixed-rate security, such as a GIC, it’s an easy number to derive. A five-year GIC that pays 4.5% would produce a projected average annual rate of return of 4.5% until maturity.

In other cases, you will have to make an estimate — for example, if you have an equity portfolio. Depending on how conservative you are, a projected average annual rate of return over time would normally fall in the 6% – 10% range. Anything higher would be unrealistic and imply a large degree of risk. – G.P.