At TSI Network, we recommend that if you are looking at investing in gold that you stay away from buying gold bullion, coins (unless you collect them as a hobby) or certificates representing an interest in bullion.
Instead, that’s why we recommend that you limit your gold investing to gold-mining stocks. Unlike bullion, gold-mining stocks at least have the potential to generate income.
More than a decade ago, the 2005 Canadian federal budget made investment-grade gold and silver coins, as well as gold or silver bullion bars, eligible to be held in an RRSP.
To be considered investment grade, gold coins must be at least 99.5% pure, and silver coins must be at least 99.9% pure. As well, only legal-tender coins produced by the Royal Canadian Mint are RRSP-eligible.
Bullion bars are also eligible for RRSP gold investing, as long as they are produced by a metal refinery that is accredited by the London Bullion Market Association. Accredited metal refineries include the Royal Canadian Mint and Johnson Matthey.
However, to hold the coins or bullion bars in your RRSP you need to find a third-party custodian of your coins or bars who will verify that you indeed hold the amount of bullion claimed, and report that to the Canada Revenue Agency on your behalf.
Investing in gold: a practical way to hold gold bars and coins in your RRSP
I was 19 years old when I first started investing. I diligently set aside money every paycheque, starting with $50 every two weeks and eventually increasing that to $200 per month, to save for retirement inside my RRSP. Sounds like I was off to a great start, right? Wrong!
Even though my intentions were in the right place, my first attempt at investing was a complete disaster. Here’s why: I didn’t have a plan
It’s good practice to save a portion of your income for the future, even at a young age. The problem for me was that I was still in school and didn’t have a plan – I had no clue what I was saving for.
I had read The Wealthy Barber and The Millionaire Next Door and so I knew the earlier I started putting away money for retirement, the longer I’d have compound interest working on my side, and the bigger my nest egg would be.
Unfortunately, I was saving for retirement at the expense of any other short-term goals, like paying off my student loans, buying a used car, or saving for a down payment on a house.
I didn’t have any short-term savings
Speaking of RRSPs, what was a 19-year-old kid doing opening up an RRSP when he’s only making $15,000 per year?
There were no real tax advantages for me to save within an RRSP when I was in such a low tax bracket. I’m sure I blew my tax refunds anyway, so what was the point?
Granted, the tax free savings account hadn’t been introduced yet, but I would have been better off using a high interest savings account for my savings rather than putting money in my RRSP.
I didn’t have a clue about fees and tracking performance
Like a typical young investor I used mutual funds to build my investment portfolio. I was encouraged by a bank advisor to select global equity mutual funds because, as I was told, they would deliver the highest returns over the long term.
What the bank advisor didn’t tell me was that the management expense ratio (MER) on some of those mutual funds can be 2.5 per cent or more, and high fees will have a negative impact on your investment returns over the long run.
Bank advisors also don’t tell you which benchmark these funds are supposed to track (and attempt to beat) so when you get your statements in the mail it’s impossible to determine how well your investments are doing compared to the rest of the market.
I drained my RRSP early
I didn’t have a good handle on my finances in my 20s and often resorted to using credit cards to get by. Without a proper budget in place, and no short-term savings to fall back on in case of emergency, I had no choice but to raid my RRSPs to pay off my credit-card debt and get my finances back on track.
Taking money out of my RRSP early meant paying taxes up front. Withdrawals up to $5,000 are subject to 10 per cent withholding tax, while taking between $5,000 and $15,000 will cost you 20 per cent, and withdrawals over $15,000 will cost you 30 per cent.
Your financial institution withholds tax on the money you take out and pays it directly to the government. So when I took out $10,000 from my RRSP, the bank withheld $2,000 and I was left with $8,000. In addition to the withholding tax, I also had to report the full $10,000 withdrawal as taxable income that year.
While I can’t argue with my reasons for selling, my dumb decisions beforehand cost me a lot of money and left me starting over from scratch.
Final thoughts
We all make investing mistakes – some bigger than others. If I had to do things over again today I would have done the following:
Create a budget – A budget is the foundation for responsible money management. Had I used a budget and tracked my expenses properly from an early age I would have lived within my means and kept my spending under control.
Open a tax free savings account – Yes, the TFSA wasn’t around back then but for today’s youth it makes much more sense to save inside your TFSA instead of your RRSP like I did. You can put up to $5,500 per year inside your TFSA and withdraw the money tax free. You contribute with after-tax dollars, so you won’t get a tax refund, but you’ll likely be in a low tax bracket anyway, so contributing to an RRSP won’t give you much of a refund either.
Make a financial plan – We all have financial goals and even at a young age I should have identified some short-and-long term priorities to save toward. I’d take a three-pronged approach where I’d use a high interest savings account to fund my short term goals, my TFSA to fund mid-to-long term goals, and eventually open an RRSP to save for retirement. No doubt I’d be much further ahead today if I took this approach earlier in life.
Use index funds or ETFs – Now that I understand how destructive fees can be to your portfolio, I’d look into building up my investments using low cost index funds or ETFs. The advantage to using index funds is that you can make regular contributions at no cost while achieving the same returns as the market, minus a small management. Some brokers also offer free commissions when you purchase ETFs.
Did you make similar mistakes when you first started investing? How did you overcome them?
In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on August 7th and is republished here with his permission.
Converting your RRSP to a RRIF is clearly the best of three alternatives at age 71 and there are four ways to make sure you get the maximum benefit from the RRIF (Registered Retirement Income Fund).
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. We think converting your RRSP to a RRIF (registered retirement income fund) is the best option for most investors.
You have three main retirement investing options:
• You can cash in your RRSP and withdraw the funds in a lump sum. In most cases, this is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income.
• You can purchase an annuity.
• Proceed with the RRSP to RRIF conversion
RRIFs are the best retirement investing option for most investors
Here’s my latest MoneySense Retired Money blog, which looks at the perennial topic of when to take the Canada Pension Plan, or CPP. Click on the highlighted text that follows: The best time to take CPP to maximize payouts. (It may be necessary to subscribe to get full access to the piece after a certain limited number of monthly views to the site).
In an earlier blog in the series, I revealed why personally I planned to take Old Age Security as soon as it was on offer, at age 65.
In this followup, I come to the diametrically opposite conclusion that the longer you commence deferring the onset of CPP benefits, the better — assuming normal health and longevity expectations.
Doug Dahmer
I consulted three major sources for the piece. One is Doug Dahmer, founder of Burlington-based Emeritus Retirement Solutions. You can also access a useful CPP tool he runs at www.cppoptimizer.com. Run Dahmer’s name in the Hub’s search engine and you can find a number of guest blogs on the topic of decumulation.
In a nutshell, Doug thinks most of us — including me and my wife — should defer CPP as late as 70, choosing instead to start withdrawing from RRSPs in our 60s, assuming the money is needed on.
Another useful source I consulted is Doug Runchey of Victoria-based DR Pensions Consulting. For a small fee, Runchey — who used to work with the CPP — will take your government-issued CPP contribution statements and crunch the numbers to tell you how to optimize your benefits.
Late on Monday, as reported by Canadian Press here via the National Post, it was announced that the federal Government has reached an agreement with most of the provinces to expand the Canada Pension Plan, or CPP. Manitoba and Quebec have yet to agree.
As the Globe & Mail reported here, this is the first significant increase in CPP benefits since the program was launched half a century ago. CP also reported that Ontario plans to drop its controversial new Ontario Retirement Pension Plan (ORPP). Once fully implemented, maximum annual CPP benefits would rise by about a third to $17,478.
The seven-year phase-in is expected to start on Jan. 1, 2019, and will require workers and employers to pay higher contributions. Once implemented, the upper earnings limit would rise to $82,700 by 2025. That would replace one third of income up to the new higher ceiling, compared to the 25% that the current CPP replaces. See also Rob Carrick’s Globe article: The Reality of CPP Reform: We Can’t Afford Not to Make These Changes.
What follows is a guest blog by Boomer & Echo’s Robb Engen, which ran this weekend just before the announcement. Minor edits to reflect that have been made but as you can see Robb — who is also a fee-for-service financial planner — pretty much expected this to happen and is generally positive about the prospect. I certainly concur that for the Echo generation he represents, this is a positive step, and since I have a 24-year old daughter, am happy for her as well. (By the way, she is also the Hub’s Millennial blogger: you can see her recent posts that run here Saturdays, such as this one).
Finance Ministers from across the country met Monday in Vancouver to discuss CPP expansion.
At stake is not just about whether we should expand the Canada Pension Plan, but how it should be phased in and who will benefit.
One proposal will see sweeping changes across the board both in terms of higher benefits and premiums paid by all workers. Another scenario targets specific segments of the population without employer pension plans who may not be saving enough for retirement.
Here’s why Canada Pension Plan expansion makes sense:
Canada Pension Plan Expansion
Canadians need to save for retirement and many of us are not doing a very good job of putting away money for our future.
CPP is a way for every working Canadian to have access to a defined benefit pension plan that will provide up to one-quarter of the national average wage in retirement.
In an age when employer pension plans are fading away and average Canadians are coping with the highest debt-to-income ratio in our history, it’s imperative of our government to revisit mandatory savings plans to ensure the financial well-being of our post-retirement citizens.
I work in the public sector, so I’m one of the lucky three in 10 Canadians who still have a defined benefit pension. I contribute approximately 12 per cent of my salary toward the plan, which my employer matches, and that pension will form the bedrock of my income in retirement.
But what do I hear from my co-workers and newly hired employees? It’s not gratitude that they have access to such a rich savings plan. No, instead it’s more like this:
“I wish such a big chunk of my paycheque wasn’t going into this pension plan. I could really use that money right now.”
I’m sure some of you would rather take the reins and invest that money on your own rather than being subject to the whims and restrictions of a public pension plan.
I trust that many of you would invest those funds wisely and maybe, just maybe, could even end up with more money at the end of your career.
But what happens to the 80-to-90 per cent of employees who may not be such good stewards of that extra money?
We could argue that people need to make better and more responsible financial choices but the fact is that savings rates for Canadians are very low by historical standards and the average Canadian family saves less than $1,500 per year.
Voluntary or Mandatory?
One area that CPP expansion will discuss, among other things, is whether to make the additional contributions voluntary. But Canada already has voluntary savings plans in the form of RRSPs and TFSAs, vehicles that Canadians don’t even come close to maxing out.
Imagine instead of mandatory payroll deductions, my colleagues and I had to opt-in to our workplace pension program: How many would willingly choose to contribute?
Behavioural economist Dan Ariely shared a fascinating chart that explained the psychological difference between opting-in and opting-out. He said countries in which organ donation was the default option had a nearly 100 per cent participation rate among its citizens, whereas countries that require citizens to opt-in to consent to organ donation had a remarkably lower participation rate (between 4 and 27 per cent).
We need CPP expansion, not because we need another “tax” on our income, but because we all benefit from living in a society that takes care of its citizens and doesn’t leave its old, disabled, widowed, victims, or simply unlucky in the lurch.
How should CPP expansion be rolled out?
First off, anyone without the luxury of a defined benefit pension plan should be automatically enrolled into a newly expanded CPP.
Forget government workers and public sector employees – they’ll be fine. It’s the other 70 per cent of the workforce without access to a workplace pension who needs the expanded program to help fund their retirement savings.
I’m also not worried about seniors today; the vast majority won’t be eating cat food in their old age – far from it.
Retirees today represent the last era of gold-plated pensions (for both the corporate and government worker) and saw unprecedented growth in the housing market, which translated (or will translate) into enormous, tax-free wealth.
Instead, think of today’s 30-something employees living in one of the larger cities in Canada. They’re starting to get established in their careers, maybe settling down and getting married. But their employers don’t offer a pension program, or even health benefits for that matter, they’re still paying off student loan debt, and they’re trying to save up for a down payment on a $400,000 condo.
There’s no chance they are saving for retirement unless it’s through some form of mandatory savings program.
So how will they afford these additional monthly CPP contributions when they’re struggling with so many other competing priorities?
People remarkably find ways to adapt to the money available in their chequing account. If they have $800, they’ll find a way to spend $800. But if they only have $600 (because $200 went toward expanded CPP contributions) they’ll find a way to spend $600 and be okay.
That’s the power of forced savings and paying yourself first. If it’s there, you’ll spend it. If it’s not there, you won’t miss it.
One interesting piece of research that came out of the Ontario government’s proposed Ontario Retirement Pension Plan was that, after accounting for some reduction in personal savings in response to ORPP contributions, personal household savings should increase by an average of 25 per cent thanks to the ORPP.
Interestingly enough, it’s people with pension plans that tend to save more outside of their pension than their private sector non-workplace pension counterparts. Saving begets more saving!
One added benefit of enhancing a program on a massive scale such as the CPP – lower fees.
Canadians currently have over one trillion dollars invested in mutual funds and pay the highest investment fees in the world. Your investment advisor won’t agree with more of your paycheque going towards a low-cost and well-run vehicle like the CPP, but investors might be better off with less of their money going into high MER mutual funds.
Final thoughts
We’re not all trying to keep up with the Kardashians; many Canadians are legitimately struggling to get by and that is the point of widening the safety net of CPP.
We need to recognize that it’s damn tough to save in today’s economic climate. Think of the couple that wants to start a family and diligently saves 10 per cent of their paycheque every month to put towards a down payment on a house in a year. But in a year, the cost of the house they were looking at has risen by 20 per cent. That’s a difficult situation.
Sometimes we act like there are only two types of people, ants and grasshoppers, while ignoring all the nuance in-between, such as the unlucky or ill-timed entrepreneur whose business failed.
Increase the band of CPP so that our contribution rate is a little bit higher and the yearly maximum limit is a little bit larger so that society as a whole can benefit from the increased savings, and in turn, the increased consumption in retirement.
Then design some favourable and flexible rules around the self-employed or those who are already blessed with a defined benefit pension.
The last thing I haven’t touched on is longevity risk and the very real possibility of outliving our savings in retirement. Our needs may change and healthcare costs may become a major challenge.
Wouldn’t you rather have access to a predictable monthly income that rises with inflation and is guaranteed whether you live to 70 or 120?
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At TSI Network, we recommend that if you are looking at investing in gold that you stay away from buying gold bullion, coins (unless you collect them as a hobby) or certificates representing an interest in bullion.
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