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All investments come with a mix of risk and potential reward. The greatest danger comes when you understand the mechanics of an investment, but you’re missing some of the details. Your understanding of the potential reward can make you greedy, while the gaps in your knowledge limit your natural, healthy sense of skepticism.
When it comes to retirement, you should be long-term focused, which takes a lot of the guessing and game playing out of the equation. The best retirement plan you can have is to start saving as early in your working career as possible. You then invest a steady or rising amount of that money in the stock market every year. When you follow this plan, you automatically profit from dollar-cost averaging. You will automatically buy more shares when prices are low, and fewer shares when prices are high.
Continue reading for more retirement advisor tips and strategies for saving.
Retirement advisor tip: Use an RRSP For Retirement
You have to learn a lot of things to become a successful investor, and few people learn them all in any logical progression. Instead, most of us move from one subject of interest to another, with a lot of zigs and zags in between.
But one tip is clear: If you want to pay less tax on your investments while you’re still working, investing in an RRSP (Registered Retirement Savings Plan) is the way to go.
To cut tax bills, RRSPs are a great option. 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.
Registered Retirement Income Funds (RRIFs) are also a great long-term retirement investment planning strategy
Converting your RRSP to a 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 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, you’ll have to wind them up at the end of the year in which you turn 71.
Annuities can hurt your retirement investing
- Interest rates make today a poor time to buy annuities: The rate of return you receive on an annuity is linked to interest rates at the time you buy it. That makes periods of low interest rates, like today, an especially poor time for buying annuities. However, if you want to buy annuities, you could buy one annuity a year for the next five years. That way, your returns will increase if interest rates rise, as is likely.
- It may be hard to get out if you change your mind: Unlike stocks, it can be difficult or impossible to sell an annuity if you decide it no longer meets your needs. Moreover, you will likely get a low price for your annuity because the date of your death is uncertain.
- Tax treatment: When you own an annuity, the income payments you receive are made up of interest and a return of your principal. The return of your principal is tax free, but the interest portion of the payment is taxed as ordinary income.
Other retirement “strategies” to avoid
- Stock options
- Penny stocks
- Junior mining stocks
Turn retirement income planning into a game
Retirement income planning doesn’t have to be about moving money around. Sometimes it’s easier to live frugally. People who come from humble circumstances often develop a degree of both frugality and industriousness early in life.
Finding part-time work while in school, and making every penny count, becomes a game for them.
It’s easy to let frugality evaporate in mid-life, when money becomes more plentiful. But some find that if they return to frugality later in life, it’s more fun than ever. It’s a little like taking pleasure from a game that you haven’t played since you were young.
Your enjoyment of, or distaste for, frugality is partly a matter of attitude. But that’s under your control. Don’t think of it as penny-pinching. Think of it as taking charge of a part of your life, so that more of your money goes to things you choose.
You can improve your returns and cut risk if you structure your retirement investing around our three-part approach at TSI Network. Invest your money mainly in well-established, dividend-paying companies. Spread your investments out across most if not all of the five main economic sectors (Manufacturing & Industry, Commodities & Resources, the Consumer sector, Finance, and Utilities). Downplay or avoid stocks in the broker/media limelight.
How have you been going about saving for your own retirement? Did you open an RRSP as part of your retirement planning? Have you hired a retirement advisor? Share your experience with us in the comments.
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 article was published on July 4, 2017 and has been republished on the Hub with permission.
