So, you’ve maxed out your registered retirement savings plan (RRSP) and tax-free savings account (TFSA). Maybe you’re a diligent saver. Or you’ve just sold a home or a business. Maybe you’ve inherited wealth. Whatever the reason, you’ve got additional money to invest. And if you were thinking about putting it into a high-interest savings account (HISA) or GIC, think again. There are better ways to grow your money.
Earn more with Non-Registered Investments
Any investment that generates positive returns will bring you closer to your financial goals. And while GICs and HISAs do generate small but guaranteed returns, historically you’re much better off generating growth in an investment than letting it sit in a slow-to-grow savings account.
The chart1below compares the growth and performance of a non-registered investment, GIC and HISA overtime. While HISAs and GICs promise consistent returns, you can see that the non-registered investment account comes out significantly ahead.
How are non-registered investments, HISAs & GICs taxed?
The most common types of investment income include: dividends, interest and capital gains. And while the income earned from investments is always subject to tax, not all forms of investment income is taxed the same way. Some investment income attracts less tax.
Investment income from HISAs and GICs is considered interest and the taxes owed are based on your marginal tax rate (which varies by income and province). This is noteworthy because this type of tax is the most expensive.
Non-registered investments have a unique advantage in that they can earn a blend of different types of income as a result of what’s held within the account (the most common includes dividend income and capital gains). This is an advantage because the gains earned are taxed at different rates, opening up an opportunity to reduce the taxes paid on the income earned. Continue Reading…
**This is a sponsored post written by me [Robb Engen] on behalf of EQ Bank. However, as always, all opinions are my own.
A guaranteed investment certificate (GIC) is unlikely to spark an exciting dinner party conversation but when stock markets are reeling, like they were earlier this year, investors often seek safe havens to wait out the storm. Cash is king for those who don’t have the stomach to watch their portfolio plunge in value, and GICs at least offer the promise of a modest return.
Back in February 2009, when the global financial crisis had just about reached rock-bottom, 30-year-old me was scrambling to meet the RRSP deadline and bought a five-year GIC. It was a costly mistake in hindsight. The Toronto Stock Exchange surged ahead for the next five years, earning annual returns of 9.52 per cent, while my five-year GIC earned an average annual return of 2.75 per cent.
Instead of turning my $7,000 contribution into nearly $10,000, I only had $7,800 to show for my decision. At the time, though, I thought the GIC was a smart move because I had to make a quick decision on what to do with my contribution, and the stock market still looked downright nasty.
Why invest in GICs?
The truth is there’s nothing wrong with stashing your savings inside the comfort of a GIC. Here are four times when it makes good sense to put your money in GICs:
1.) When your entire portfolio is sitting in cash, waiting for “the right time” to get into the market
If you’re the type of investor who can’t ignore the doom-and-gloom economic headlines, and who’s convinced that a market meltdown is always imminent, maybe the stock market isn’t right for you.
Having your retirement savings constantly sitting in cash and earning nothing is like sitting on the fence and being paralyzed to move for fear of making the wrong decision at the wrong time.
A GIC ladder, which might involve purchasing equal amounts of one, two, three, four, and five-year terms, will maximize your risk-free returns and still give you the option of dipping your toes in the market each year when one of the terms comes due.
2.) When your investing strategy boils down to chasing last year’s winning stocks or mutual funds
If you’re the type of investor who’s constantly looking for the latest fad, you might be falling victim to the behaviour gap – the difference between investment returns and investor returns.
Consider that, according to DALBAR, from 1986 to 2016 the S&P 500 Index averaged 10.16 a year, but the average equity fund investor earned just 3.98 a year.
When you think about our poor investor behaviour, coupled with sky-high mutual fund fees (at least, here in Canada), those investors who just can’t help themselves might be better off parking their savings in the best five-year GIC and earning a guaranteed return. Continue Reading…
The biggest concern for many investors is the fear of losing their money. The stock markets have shown some volatility the last few weeks, and the recent screaming headlines in the financial media do nothing but encourage panic.
Some people think the latest bull market has overvalued stocks and a major market meltdown is imminent. They are sitting on their cash and waiting for the right entry point.
According to a BlackRock survey, 70% of adults aged 25 to 36 are also clinging to cash assets. Apparently, these Millennials don’t have much trust in the stock market and are afraid of another large market crash. This puts them at risk of not having enough saved to enjoy a comfortable retirement.
It’s true. Investing in equities does carry risks. Market corrections (drop of about 10%) are common. Bear markets (drop of 20% or more) will likely occur during an investor’s lifetime.
Even a reasonably diversified portfolio of stocks lost about half of its value during the 2008-2009 market crash. However, avoiding equities completely isn’t the best strategy. The stock market can be good to investors who have the discipline.
What can you do to get over your stock market fears?
1.) Educate yourself
Combat your fears with knowledge. Learn the basics: how the markets work so you can prepare yourself for future market conditions. The more you know, the less afraid you become, but avoid information overload.
Stop reading the gloom and doom reports in the financial media. Your financial education should not come from the news media. They need something to report and tend to sensationalize short-term market events to grab our attention. Just because something appears in print doesn’t guarantee that the information is correct. Look for reliable sources.
Investing magazines and books can provide useful information.
Knowledge is freely available on the Internet. Basic investing information is available at sites like Get Smarter About Money and Canadian Securities Administrators. Some social media sites, forums and financial blogs are worthwhile if written by knowledgeable authors.
Lack of confidence and second guessing yourself can paralyze your decision making. If you’re afraid of picking the wrong investments, turn to a professional for help. You could also try one of the many well-publicized model portfolios that have yielded good returns.
2.) Take a long-term investing approach
The biggest fear of investing is losing a lot of money in a short period of time.
Investing is a long-term process and is most likely your only way to reach your long-term financial goals.
Don’t keep monitoring your portfolio. This is psychologically hard, but don’t let short-term losses bother you too much. No one likes losing money, but it will be temporary. You’re not going to need this money to survive tomorrow, or next month, will you?
Acknowledge short-term market risks, but trust in long-term historical gains and commit to long-term investments. Continue Reading…
If you lack what finance professor and author Moshe Milevky calls a “real” pension (i.e. an employer-sponsored Defined Benefit plan), then you’re a likely candidate for annuitization or at least partial annuitization of your RRSP and/or RRIF.
My latest MoneySense Retired Money column revisits Fred Vettese’s excellent new book, Retirement Income for Life, and in particular his third “enhancement” suggestion for maximizing retirement income. We formally reviewed Vettese’s book in the MoneySense column before that, and commented on it further here at the Hub.
You can find the new piece drilling down on the partial annuitization enhancement by clicking on the highlighted headline: RRIF or Annuity? How about Both.
One of the main sources in the piece is fee-only planner Rona Birenbaum (pictured above with Fred Vettese), who has some useful videos on YouTube about annuities, including an interview with Vettese about the partial annuitization strategy described in the new MoneySense column. See Is it time for annuities?
Expect an annuity wave from retiring boomers without DB pensions
Certainly you’re going to hear a lot more about annuities as the baby boomers move seriously from Wealth accumulation mode to de-accumulation, aka “decumulation.” Coincidentally both Vettese and I are 1953 babies with April birthdays. In an interview with Fred, he told me he bought some annuities a year ago and that he believes that those who plan to retire at age 65 (and who lack a traditional employer-sponsored Defined Benefit pension) should consider at least partly annualizing at 65, to the tune of roughly 30% of the value of their nest egg (typically in an RRSP or RRIF). That means registered annuities.
Certainly, in light of the 10% “correction” in stocks that occurred in the last few weeks, the possibility of a more severe stock market retrenchment has to be upper most in the minds of soon-to-retire baby boomers. I note in his recent G&M column, Ian McGugan (in his early 60s) confessed he was slowly starting to take some profits from stocks and move them to safer fixed-income investments like GICs. See The Market’s gone mad: Here’s how to protect yourself. See also Graham Bodel’s article earlier this week: Response to an investor who frets the market is going to crash.
Annuities are one way to hedge against market risk, since you’re in effect transferring some of the market risk inherent in an RRSP or a RRIF to the shoulders of the insurance company offering the annuity. That’s one reason in the YouTube video above, Vettese talks about partly annuitizing as soon as you retire, whether that be age 65, or sooner or later than that traditional retirement date.
Financial advisors may not agree with all of Vettese’s five “enhancements.”
The earlier column reviewing the book mentioned that not many of Vettese’s “enhancements” to retirement income may be endorsed by the average commission-compensated financial advisor. Even so, as the Royal Bank argued earlier this year here at the Hub, annuities can help fund a full lifestyle in retirement. It observed that 62% of Canadians aged 55 to 75 are worried they’ll outlive their retirement savings but only 10% use or plan to use an annuity to ensure they’ll have a viable lifestyle in retirement.
Regular Hub contributor Robb Engen — a fee-only financial planner who also runs the Boomer & Echo website — wrote recently (on both sites) that annuities are one way retirees or would-be retirees without traditional DB pensions can Create their own personal pension in retirement.
As I note in the MoneySense column, while I’m certainly approaching the age when partial annuitization may make sense, I’ll probably wait a year or two. But in preparation for that possibility, as well as for the column, I asked Birenbaum to prepare three quotes for a $100,000 registered annuity, starting at ages 65, 70 and 75. As you might expect, the longer you wait to begin receiving payments, the higher the payout, but it’s not such a massive rise that you could rule out early payments if you really needed them to live on.
The mechanics of buying an annuity
And should you be ready to take the step, it’s not all that complicated. In the above case, you would liquidate $100,000 worth of investments in your RRSP so the cash is available to transfer, then complete an annuity purchase application and fill out and submit a T2033 RRSP transfer form. That form is sent to your RRSP administrator, and they transfer the cash to the insurance company without triggering tax. Once all these preliminary steps have been taken, payments begin the month following the annuity purchase.
Oh, and one last step, Birenbaum adds: Start relaxing!
Now that interest rates have finally appeared to bottom, consumers are starting to worry about the prospect of rising rates and their impact on their personal finances.
It describes a new Forum Research Inc. poll that shows more than half of Canadians (51%) fear rising rates will negatively impact their personal finances. The national poll of 1,350 voting-age adults was conducted after the Bank of Canada raised the prime interest rate from 0.75 to 1% on September 6th, which in turn followed an initial 0.25% hike in July.
After an amazing run of nine years of ultra-low interest rates, it’s clear consumers are starting to fret the party is over. Anyone with variable-rate mortgages might well be petrified that interest rates could again reach the high teens, as they did in the early 1980s. Little wonder that many homeowners are starting to “lock in” to fixed mortgages while rates are still relatively low.
Of course, as Credit Canada’s Laurie Campbell notes, for the longest time it’s paid to stay variable and flexible, whether with a variable-rate mortgage or a line of credit. It does cost a bit more to “lock in” to fixed mortgages, as Campbell notes, but the ability to sleep well at night in my opinion more than makes up for the difference.
While the poll asked specifically how consumers felt about the second hike, “they are worried more are coming,” Forum Research president Lorne Bozinoff told me. 12% say the negative effect will be extreme. However, 17% believe rate hikes will have some positive aspects: you’d expect debt-free seniors to welcome higher returns on GICs and fixed-income investments. Another 38% don’t think it will have an effect either way.
Lorne Bozinoff
A quarter have no emergency savings at all
Bozinoff is more concerned that 26% of respondents have no emergency savings, and 40% have a cushion of a month or less: 9% have less than a month and 11% just a one-month cushion.
Financial planners generally recommend three to six months as a hedge against job loss or other setbacks. A minority do: 14% have two to three months, 9% four to five months, and 13% six months to a year. Only 15% have a year or more and predictably, 56% of the latter group are 55 or older. Continue Reading…
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