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Retirement investing advice is a subject we’re asked about all the time. And it’s one that we deal with on a practical day-to-day basis with our Successful Investor Wealth Management clients.
If you want to pay less tax on dividends while you’re still working, investing in an RRSP (Registered Retirement Savings Plan) is the way to go. That’s because dividends you receive in an RRSP grow tax free.
Is an RRSP the best savings plan for retirement?
RRSPs are a great way for investors to cut their tax bills and make more money from their retirement investing.
RRSPs are a form of tax-deferred savings plan. RRSP contributions are tax deductible, and the investments grow tax-free. (Note that you can currently contribute up to 18% of your earned income from the previous year. March 1 is the last day you can contribute to an RRSP and deduct your contribution from your previous year’s income.)
When you later begin withdrawing the funds from your RRSP, they are taxed as ordinary income.
A Registered Retirement Income Fund (RRIF) is a great long-term investing strategy for retirement
Converting your RRSP to an RRIF is clearly one of the best of three alternatives at age 71. That’s because RRIFs offer more flexibility and tax savings than annuities (see the pros and cons of annuities on TSI Network) or a lump-sum withdrawal (which in most cases is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income).
Like an RRSP, a RRIF can hold a range of investments. You don’t need to sell your RRSP holdings when you convert: you just transfer them to your RRIF.
When you hold a RRIF, you must withdraw a minimum each year and report that amount for tax purposes. (You may withdraw amounts above the minimum at any time.) The Canada Revenue Agency sets your minimum withdrawal for each year according to a schedule that starts at 5.28% of the RRIF’s year-end value at age 71, reaches 6.82% at age 80, and levels off at 20% at age 95.
If you have one or more RRSPs (registered retirement savings plans), you’ll have to wind them up at the end of the year in which you turn 71.
Bonus RRSP advice: Confine your RRSP holdings to high-quality investments that expose you to less risk of permanent loss. If you are going to delve into aggressive investments, keep them out of your RRSP.
Avoid these investment “strategies”
Stock options: Stock options are expensive to trade. You pay commissions each time you buy or sell stock options. Commissions eat up a large part of any profits you may make with stock options, particularly if you trade in small quantities. What’s more, every trade costs you money in “slippage,” or the difference between the bid and the ask price. With options, this difference is larger than it is with stocks.
Penny stocks: Penny stocks tend to be speculative, and are engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology or launching new software. They are unproven companies that have very little chance of becoming a sustainable business. You’ll also have to be on the watch for unscrupulous stock promoters who will over-inflate earnings and talk up a stock for their own best interests.
Junior mining stocks: Junior mining stocks are highly speculative, and are apt to cost you money. It’s relatively cheap and easy to launch an exploration program and sell stock to the public. So the junior mine’s promotion business attracts more than its share of unscrupulous operators and stock promoters. Putting your savings into the type of business that has a million to one chance of striking it rich is not a retirement investment strategy, it’s gambling.
Learn what you can do without
Start by doing a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. For instance, cutting out fast food can save the average Canadian anywhere from hundreds to thousands of dollars a year. In retirement, you’ll have time for a cooking class or two, and soon you’ll be able to cook better-tasting and healthier food than you can buy at any fast-food chain. The cost difference between home cooking and fast food can be substantial, and it’s like tax-free income.
Do you have any additional retirement investing advice to share? Add your insight in the comments section.
Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This blog originally ran on TSI’s site on Nov. 18, 2016 and is republished here with permission.
