Tag Archives: RRSPs

Perfect storm of challenges awaits Canadians this RRSP season, survey finds

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Photo credit Wes Tyrell

A “perfect storm” of challenges faces Canadian investors this RRSP season, according to a a national online study conducted on the Angus Reid Forum Panel for Co-operators, released Tuesday. Jan. 25.

After surveying financial professionals across the banking and wealth management sectors, the panel believes this  “perfect storm” can be attributed to the uncertainty of this past year and to DIY [Do It Yourself] investing strategies.

2022 is poised to be a unique RRSP season because of multiple unique market conditions, the study finds: 58 per cent agree that in the face of rising consumer debt, natural disasters (climate change), Omicron, and looming hikes in interest rates, we are approaching a “perfect storm” of challenges, a figure that jumps to 65 per cent in Quebec.

Key findings

  • 80 per cent percent of respondents say that when people experience financial mishaps or losses, many feel overcome with doubt, which leads to indecision and in-action.
  • 76 per cent hypothesize that for many Canadians living in urban centres, home ownership is increasingly feeling out of reach, and because of this, many are looking for DIY investment strategies.
  • 93 per cent say the majority of Canadians have unleveraged opportunities in that they haven’t maximized their RRSP planning and TFSAs.

“By initiating a much-needed national conversation around financial literacy, the hope is that more Canadians will feel empowered to seek counsel from a financial advisor and develop a strategic financial plan to help achieve their goals,” Co-operators said in a press release.

Conducted in January 2021, “Canadian Attitudes on RRSPs” was designed to examine the state of RRSPs, TFSAs and retirement planning strategies that Canadians are using to secure their financial futures – all from the perspective of industry professionals with their ears to the ground across the country.

Consumer confusion appears to be rampant when it comes to understanding the different roles of RRSPs and TFSAs. 90 per cent of financial professionals believe most Canadians” have a lot of confusion” about those two key retirement savings vehicles.

This is reflected in similar confusion about Saving versus Investing: 70 per cent say they see Canadians declining in their ability to differentiate between saving and investing.

The study also sees what it calls “unleveraged opportunities”: 93 per cent think the majority of Canadians haven’t yet maximized their opportunities with RRSP planning, TFSAs, and other programs.

A majority (85%) of  industry pros attribute the influence of today’s “culture of now” as hindering people from seeing retirement planning as a priority.

The venerable Registered Retirement Savings Plan (RRSP) also seems to be suffering from the challenge of an “old school image”: 57 per cent say too many Canadians today see RRSPs as “an investing tool of the past” that is no longer as attractive today.

Adding to the angst is the continuing decline of availability of Defined Pension [DB] plans offered by employers: 85 per cent think defined benefit pension plans are going extinct. They too are viewed as a thing of the past: something Canadians don’t expect to have when they retire.

No surprise then that Early Retirement is largely regarded as a myth:  92 per cent of advisors believe that because most Canadians aren’t saving enough for retirement, concepts like “early retirement” are becoming more elusive.

What’s holding Canadians back

When it comes to identifying the causes for Canadians holding back on retirement saving, the survey found financial losses generally contribute to indecision: 80 per cent of advisors say when Canadians experience financial mishaps or losses, many become overcome with doubt, which then leads to indecision and in-action. In addition, 73 per cent see a stigma of shame among many Canadians around financial mishaps or losses.

Just the fact they feel they are not saving added to their stress: 80 per cent see many Canadians feeling paralyzed from the stress of not having enough savings to meet their long-term needs. And many also feel pressure to be perceived as  “financially in-the-know.” 65 per cent think there is social pressure among Canadians to appear “financially savvy.” Continue Reading…

Behavioural Finance focus: Cost Savings tips to attain Financial Freedom

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Photo: Towfiqu barbhuiya on Unsplash with modifications by LowrieFinancial.com

By Steve Lowrie, CFA

Special to the Financial Independence Hub

As a personal financial advisor, I am often asked about “the secret” to attaining financial freedom. Not to go all metaphysical on you, but to improve your long-term outcomes, try looking inward. After all, you are among the few drivers you have much control over. One great way to sharpen your financial acumen is by combining behavioural finance with an evidence-based perspective. Together, these disciplines offer reams of insights on how tending to your own best practices is often the best-kept secret to enjoying wealth management success.

Finding your Behavioural Finance focus

Here’s how The Behavioral Investor author Daniel Crosby describes behavioural finance:

“Emotional centers of the brain that helped guide primitive behavior like avoiding attack are now shown by brain scans to be involved in processing information about financial risks. These brain areas are found in mammals the world over and are blunt instruments designed for quick reaction, not precise thinking. Rapid, decisive action may save a squirrel from an owl, but it certainly doesn’t help investors. In fact, a large body of research suggests that investors profit most when they do the least.”

As early as the 1970s, Nobel laureate Daniel Kahneman was a driving force behind the formation of behavioural finance (along with Nobel laureate Richard Thaler and the late Amos Tversky). In his landmark book, “Thinking, Fast and Slow”, Kahneman describes this same quick vs. precise thinking as System 1 vs. System 2 thinking:

“System 1 [thinking] operates automatically and quickly, with little or no effort and no sense of voluntary control. System 2 [thinking] allocates attention to the effortful mental activities that demand it, including complex computations.”

Long before the term “behavioural finance” was a thing, wise academics and practitioners alike were suggesting investors are best off avoiding their fast-thinking instincts in favor of slower-thinking resolve. As billionaire Warren Buffett said decades ago:

“Success in investing doesn’t correlate with I.Q. … Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

Buffett is correct. And yet, from what I see every day, fast, reactionary thinking continues to dominate most investors’ actions. What else could explain the never-ending parade of people chasing after FOMO (fear of missing out) investment trends instead of following the simple investing strategies, an evidence-based mindset prescribes?

Your brain’s take on Wealth Management

What’s actually going on in our heads when we allow our instincts and emotions to overcome our higher reasoning? Wall Street Journal columnist Jason Zweig’s “Your Money & Your Brain” takes us on a fascinating tour inside the mechanics in our own heads.

For example, Zweig warns us:

“…the amygdala [in your brain] can flood your body with fear signals before you are consciously aware of being afraid … [and] the nucleus accumbens in your reflexive brain becomes intensely aroused when you anticipate a financial gain.”

In this related piece, “It’s the Little Things That Can Color an Investor’s Outlook,” Zweig describes how even seeing the same financial numbers in red vs. a neutral color can unwittingly change our feelings about the data. Additional “insidious influences” include whether we’re hungry or full, sleepy or awake, or experiencing a cloudy or sunny day.

These sorts of overcharged emotions and unconscious biases can steer you wrong when you’re deciding whether to buy, sell, or hold your investments. They can also knock you off course from your holistic financial planning.

Nudging your way to Cost Savings

By adding academic rigor to our thinking, behavioural finance improves our ability to identify and manage our behavioural weaknesses. We can then apply that knowledge toward not reacting to the quick tricks our brain plays on us. Better still, we can learn how to play tricks right back on our brain: turning otherwise adverse instincts to our advantage. Continue Reading…

Can Dynamic Pension Pools strengthen Canadians’ Retirement Income Security?

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Image courtesy National Institute on Ageing

A new report published by the National Institute on Ageing (NIA) and the Global Risk Institute (GRI) being published today aims to help overcome the $1.5-trillion Decumulation Disconnect in the Canadian Retirement Income System.

Titled Affordable Lifetime Pension Income for a Better Tomorrow, the report makes the case for how Dynamic Pension (DP) pools can strengthen retirement income security for millions of Canadian seniors. Here is the link to the full report.

The urgency is apparent when you consider that 10 million Canadian baby boomers are now entering retirement: with longer life expectancies and a greater dependency on private savings to sustain them. As the report’s authors write, “it’s more important than ever to find solutions that will help retiring Canadians turn their accumulated savings into low-cost lifetime pension income.”

Bonnie Jeanne MacDonald/Ryerson/National Institute on Aging

Lead author Dr. Bonnie-Jeanne MacDonald, Director of Financial Security Research at the NIA, says fears that retiring Canadians’ savings won’t sustain them in retirement are “legitimate …  Financial markets, inflation and health expenses are just some of the big unknowns that retirees will need to face over 10, 20, 30 or even 40 years.”

According to the report, Dynamic Pension [DP henceforth] pools have the potential to transform the Canadian retirement landscape. Their goal is simple: to help people optimize their expected lifetime retirement income while ensuring they never run out of money. In other words, gurantee that they won’t run out of money before they run out of life.

Pooling Longevity Risk

While protecting individuals from outliving their savings (i.e., longevity risk) can be prohibitively expensive, the same protection becomes affordable when spread across a large group. Pooling longevity risk allows retirees to spend their savings more confidently while they are alive, says the report.

In a DP pool, pension amounts are not guaranteed but may fluctuate from year to year. This means retirees can stay invested in capital markets and benefit from the higher expected returns.

DP pools have a risk-reward profile that is fundamentally different from current options and products available for older Canadians: such as guaranteed annuities purchased through insurance companies or individually managing and drawing down savings from personal retirement savings accounts, says another of the report’s authors, Barbara Sanders, Associate Professor at Simon Fraser University,  “Retirees who are comfortable with some investment risk can stay invested in equity markets and reap the associated rewards, which is important in today’s low-interest and high-inflation environment.” Continue Reading…

JP Morgan, RBC on post-Covid Retirement trends

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A couple of recent surveys from J.P. Morgan Asset Management and RBC shed a fair bit of light into recent Retirement trends in North America in the wake of the ongoing Covid-19 pandemic. Summarized in the October 2021 issue of Gordon Wiebe’s The Capital Partner newsletter, here are the highlights:

First up was J.P. Morgan on August 19 in a study focused on de-risking for investors approaching retirement and about to draw down on Retirement accounts.

The study was quite comprehensive, drawing on a data base of 23 million 401(k) and IRA accounts and 31,000 Americans. 401(k)s and IRAs are similar to Canada’s RRSPs and RRIFs.

De-risking is quite common, with 75% of retirees reducing equity exposure after “rolling over” their assets from a 401(k) to an IRA. These retirees also relied in the mandatory minimum withdrawal amounts.

Of those studied, 30% received either pension or annuity income, and the median value of Retirement accounts was US$110,000. The median investable assets were roughly US$300,000 to US$350,000, with the difference coming from holdings in non-registered accounts.

Not surprisingly, the most common retirement age was between 65 and 70 and the most common age for commencing the receipt of Social Security benefits was 66. (Coincidentally, the same age Yours Truly started receiving CPP in Canada.)

The report warns that retirees who wait until the rollover date to “de-risk” or rebalance portfolios needlessly expose themselves to market volatility and potential losses: they should consider rebalancing well before the obligatory withdrawal at age 71.

The newsletter observes that 61-year-olds represent the peak year of baby boomers in Canada and cautions that if they all retire and de-risk en masse, “Canadian equity markets will likely undergo increased downward pressure and volatility. Retirees should consider re-balancing or ‘annualizing’ while markets are fully valued and prior to an increase in capital gains or interest rates.”

The report includes several interesting graphs, which you can find by clicking to the link above. The graph below is one example, which shows average spending (dotted pink line) versus average retirement income (solid green line.) RMD stands for Required Minimum Distributions for IRAs, which is the equivalent of Canada’s minimum annual RRIF withdrawals after age 71.

EXHIBIT 4: AVERAGE RETIREMENT INCOME AND SPENDING BY AGES Source: “In Data There Is Truth: Understanding How Households Actually Support Spending in Retirement,” Employee Benefit Research Institute & J.P. Morgan Asset Management.

RBC poll on pandemic impacts on Retirement and timing

Meanwhile in late August, RBC released a poll titled Retirement: Myths & Realities. The survey sampled Canadians 50 or over and found that the Covid-19 pandemic has caused some Canadians to “hit the pause button on their retirement date.” 18% say they expect to retire later than expected, especially Albertans, where 33% expect to delay it.

They are also more worried about outliving their money, with 21% of those with at least C$100,000 in investible assets expecting to outlive their savings by 10 years. That’s the most in a decade: the percentage was just 16% in 2010.

Sadly, 50% do not yet have a financial plan and only 20% have created a final plan with an advisor or financial planner.

Those near retirement are also resetting their retirement goals. Those with at least $100,000 in investable assets now estimate they will need to save $1 million on average, or $50,000 more than in 2019. 75% are falling short of their goal by almost $300,000 on average.

Those with less than $100,000 have lowered their retirement savings goal to $533,153 from $574,354 in 2019, and the savings gap is a hefty $472,994.

To bridge the shortfall, 37% of those with more than $100K plan stay in their current home and live more frugally, compared to 36% of those with under $100K. 31% and 36% respectively plan to return to paid work, 31% and 23% plan to downsize or move, and 3 and 5% respectively intend to ask a family member for financial assistance.

 

 

Tax Strategies to Boost your Financial Savings

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Lowrie Financial/Unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Today’s Simple Investing Take-Away: Your tax planning strategy should take a holistic, tax-efficient investing stance in both tax-sheltered and taxable investment vehicles to optimize saving for the future.

Does it bug you to pay more taxes than you need to? I don’t think I’ve ever met anyone eager to shell out extra money, just in case the government could use more. But practically speaking, that’s exactly what you end up doing if you don’t build tax-efficient investing and other tailored tax strategies into your ongoing financial planning.

Are you:

  • A young professional, aggressively saving for a distant future?
  • A seasoned business owner, managing substantial financial savings
  • Starting to spend down your assets in retirement?
  • Planning for how to pass your wealth on to your heirs?

Regardless, there are many best practices for maximizing your after-tax returns—i.e., the ones you get to keep. Today, let’s cover what some of those sensible tax strategies look like.

Fill up your Tax-Sheltered Accounts

The government offers a number of “registered” investment accounts to provide various types of tax-efficient investing incentives. They want you to save for retirement and other life goals, so why not take them up on the offer? Two of the big ones are the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA).

Saving for Retirement with Your RRSP

As the name suggests, your RRSP is meant to provide tax-efficient investing for retirement. In the years you contribute to your RRSP, you receive a deduction on your tax return in equal measure. Then the proceeds grow tax-free. Once you withdraw RRSP assets in retirement, you pay income tax on them.

In theory, your tax rate is often lower once you retire, so you should ultimately pay fewer taxes on taxable income. Even if there are some retirement years when your tax rates are higher, you’ve still benefited from years of tax-free capital growth in an RRSP. And you still have more flexibility to plan your RRSP withdrawals to synchronize with the rest of your tax planning.

Bonus tips: If you’re a couple, you may also consider using a spousal RRSP to minimize your household’s overall tax burden. This works especially well if one of you generates a lot more income than the other. There also are specialized guidelines to be aware of if you’re a business owner considering how to most tax-efficiently draw a salary and participate in the Canada Pension Plan (CPP).

Saving for the Future with Your TFSA

TFSAs are meant to be used for tax-efficient investing toward any mid- to long-term financial goals. So, at any age, most taxpayers are well-advised to fill up their TFSA space to the extent permitted. You fund your TFSA with after-tax dollars, which means there’s no immediate “reward” or deduction on your tax return in the year you make a contribution. But after that, the assets grow tax-free while they’re in your TFSA, and you pay no additional taxes when you withdraw them, which you can do at any time.

Bonus tip: Too often, people leave their TFSA accounts sitting in cash, using it like an ATM machine. Unfortunately, this defeats the purpose, since you lose out on the tax-free gains you could expect to earn by investing that cash in the market. How much is tax-efficient investing worth? In “Cash is not king: A better investment strategy for your TFSA,” I offer some specific illustrations.

Manage your personal Tax Planning like a Boss

Once you’ve filled your tax-sheltered accounts, you can invest any additional assets in your taxable accounts.

Like hard-working “employees,” these assets can thrive or dive depending on their management. Think of it this way: As a business owner, you wouldn’t hire a promising team of talented individuals, only to assign them random roles and responsibilities. Likewise, your various investments and investment accounts have unique qualities worth tending to within your overall tax-efficient investing. Let’s cover a few of them here.

Capital Gains Reign

In your taxable accounts, your best source of tax-efficient investing income comes in the form of capital gains or even better, deferred/unrealized capital gains. This is super important, but often forgotten in the pursuit of sexier trading tactics, like chasing hot stocks or big dividends. (It’s popular to think of dividends as a great source of dependable income in retirement, but in “Building your financial stop list: Stop chasing dividends,” I explained why that’s mostly a myth.)

Don’t believe me? Consider these 2021 combined tax rates for Ontario on various sources of investment income:

Taxable Income Source

2021 Combined Tax Rate

Interest and other income

53.53%

Eligible dividends (mostly Cdn. companies)

39.34%

Capital gains

26.76%

Source: CI Global Asset Management
This illustration assumes a top marginal tax rate in Ontario, or taxable income greater than $220,000. But the point remains the same at other rates: You can usually lower your taxes by favouring capital gains over other sources of taxable income.

Also remember, you don’t pay taxes on a capital gain until you actually “realize” it, by selling an investment for more than you paid for it. Combine this point with the rates just presented, and your ideal investment strategy seems obvious: Tax-efficient investing translates to a low-cost, low turn-over, buy-and-hold approach.

Since minimizing the impact of taxes is a huge way to improve on your overall rate of returns, this happens to be exactly what I advise for any of your investments, whether you’re holding them in a taxable or tax-sheltered account.

Bonus tip: Once you’ve embraced low-cost, low-trade investing, be sure to also use funds from fund managers who are doing the same. It defeats the purpose if you are being disciplined about your tax-efficient investing, but the underlying funds in which you’re invested are not.

Asset Location Is where it’s at

As your wealth accumulates, you’re likely to end up with a mixture of registered and taxable accounts. You can reduce your overall tax burden by managing these accounts as a single, tax-efficient portfolio, instead of treating each as an investment “island.” Asset location means locating each kind of investment, or asset, in the right type of account, given its tax efficiency:

  1. Hold your relatively tax-inefficient assets in tax-favoured accounts, where the inefficiencies don’t matter as much. Examples include bonds, which generate interest and other non-capital-gain income; and investments that have higher than average yields such as REITs.
  2. Hold your relatively tax-efficient assets in taxable accounts; examples include broad domestic or global stock funds that generate most of their returns as capital gains.

An Easy Rebalancing Strategy

As I covered in “Rebalancing in Down Markets, Scary But Important,” it’s essential to periodically rebalance your investment portfolio. It’s like tending to your garden by thinning out (selling) some of the overgrowth, and planting (buying) where you need more. This keeps your productive portfolio growing as hoped for, with a buy low, sell high strategy.

But as usual, there’s a catch: When you “sell high” in a taxable account, you’ll realize taxable gains. So, whenever possible, try using cash you’d be investing anyway to do your rebalancing for you. Instead of just plopping any new investable cash into haphazard holdings, invest it wherever your portfolio is underweight relative to your goals. In so doing, you can improve on your tax-efficient investing. (PS: Here’s another post I’ve published, with additional ideas on “What to Do with Excess Cash.”)

Tax-Loss Harvesting

Again, one of the best ways for your assets to grow tax-efficiently is within your registered, tax-sheltered accounts. That said, tax-loss harvesting is one tax-efficient investing strategy you can only do in a taxable account. Without diving too deep, when one or more of your holdings is worth less than you paid for it — but over the long run you expect the position to grow — you can use tax-loss harvesting to:

  1. Sell the depreciated position to generate a capital loss, which you can then use to offset current or future taxable gains.
  2. Promptly buy a similar (but not identical!) position so you remain invested in the market as planned.
  3. Eventually (optionally), reinvest in the original position to restore your portfolio to its original mix.

Again, all this only works within a taxable account. Also, the CRA has strict rules on what qualifies as a true capital loss, and may disallow it if you violate those rules. This makes it one smart strategy best completed in alliance with your personal financial advisor.

Advanced Tax Strategies for Families and Business Owners

We’ve barely scratched the surface on the myriad tax-planning strategies you can deploy in your quest to pay no more than their fair share of income taxes. Depending on your particular circumstances, you can take advantage of some of these tax strategies: Continue Reading…