Monthly Archives: January 2012
Here in Canada the CRA or Canada Revenue Agency, allows residents to contribute to their RRSP within the first 60 days of the following Calendar year. And this year is a leap year as well, so we are given 1 extra day to contribute!
The RRSP contribution Deadline for 2011 is February 29th 2012. This means all contributions must be made before March 1st 2012, and since we have a leap year, that means we have 1 more day than normal this year to contribute. But why the rush? Why do so many people wait until the last minute to contribute? As it is a fact that over the last 50 years of investing, those who contribute systematically, ie monthly will always beat a 1 time deposit at contribution time.
Even in RRSP investing, it is all about supply and demand. Demand for Investments goes up between January and March consistently every year, in 2005 we saw the trend, in 2006 same, in 2007, 2008, 2009, 2010, 2011 and now it is trending higher again for the rush to Invest.
So by using a systematic approach to investing, by setting your RRSP up on a monthly PAC program, you will benefit by Averaging out your purchases of Investments. When the prices of Investments are high, you will buy fewer units of that Investment, and when the prices of Investments are low, you will buy more units of the same Investment. That way by the end of the year, you will have made a better return simply by setting your RRSP on Autopilot.
As well the maximum allowable contribution to your RRSP in 2011 is 18% of your Income, up to a maximum of $22,450.
Any un-used RRSP room will be carried forward for use in future years. So if you only have $10,000 to contribute for this year, $12,450 will be carried into the future. This is important as it will allow you to make large deposits into your account in the future, and can potentially eliminate taxes due in a future year of income.
Here's how it can work for you...
Lets say you have an RRSP maximum contribution limit that you have been accumulating over the years, and it has now added up to say $75,000. And maybe in the year, you receive an inheritance of $75,000 from a deceased relative. You can take that $75,000 and directly invest it into your RRSP account, and you will make the first $75,000 of Income in that year, entirely Tax Free. Now if you didn't have the contribution room, or the income of $75,000 for that year, then the numbers would be adjusted, but it gives you an idea of how the Carry Forward can work for you in the future.
Another Great Idea for your RRSP.
What about an RRSP catch up Loan? Here you can make one large deposit, and pay for it into the future. So if you have a heavy tax obligation for 2011, and you have a lot of unused RRSP Contribution room, you can use this strategy to reduce your taxes today, while paying for the loan over a specified period of time, such as 1 year, 2 years, 5 years or even 10 years. This way you get the benefit of Investing today & the Tax Deduction of today, without the financial burden of trying to come up with a huge sum of money.
There are many ways to maximize the value of your RRSP, but you have to do it before March 1st 2012, or you will lose the Tax Deduction of an RRSP for the 2011 Tax Year.
We help so many people throughout the year, but it is certainly the busiest time of year between January and March, please give our office a call today, and see how we can help you out as well. We have no minimum account values to work with our clients, so if you have $1,000 or $100,000, we are here to help either way. As well, we do not charge any fees to our clients, as we are paid by the Financial Institutions whom we place your money with. This is one of the great benefits of working with an Investment Broker, as opposed to one of the Big Banks.
Check out these great Articles too!
For years the "Guru Economist's" have suggested to get out of bonds, as interest rates are at historical lows, and the fees associated with Bond Funds can outstrip their returns... Hogwash I say!
I can point to an article published by the Globe and Mail's Rob Carrick Personal Financial Columnist in September of 2010, with the article titled "Stop Buying Bond Funds"...
In the article the columnist points out that the Bond Fund Universe was about to collapse upon itself, and that the run was over for the safety of Bonds. This has proven to be the complete opposite since the article was published.
In the same article Avery Shenfeld of CIBC was quoted as saying "There’s little prospect of a rally here, so the odds are that yields begin to rise and bond funds perform relatively poorly."
Fact: Bond Funds were the only consistent positive performers of 2011...
Here are the top 5 reasons why you want to have some of your RRSP assets in a Bond Fund, contrary to what the "Guru's" have to say...
Bond Funds in their nature are a Safe Place to park your retirement money until you are ready to use it. A good Bond Fund will weight the fund with both long and medium term bonds.
2. Ability to hold Long Term assets for a shorter Term.
If you as an individual investor wanted to purchase a specific bond, you would have to hold the Bond until its maturity date, which may be years into the future. When you invest in a Bond Fund, the Fund itself will wait for those assets to mature while you are given the ability to use the money much sooner than the bonds actual maturity date.
3. A Bond Fund doesn't necessarily invest all its money in Canada Savings Bonds.
When we hear people talking about the negatives about Bonds, they are talking about the individual Bonds themselves, not Bond Funds. Bond Funds invest your money in a variety of Bonds, such as Municipal Bonds, good Corporate Bonds and maybe some International Bonds. When you combine them all together, you are getting a far better rate of return than a Canada Savings Bond, no matter how long you hold it for. Currently the 10 year rate for Canada Savings Bonds are less than 2%. The historical return of a Bond Fund is closer to 5% across the board over the last 60 years worth of tracking.
4. A safe place to take your money from when the markets are in a downward spiral.
If you are in, or nearing retirement when there is a financial crisis, there are two things you can traditionally do, Don't Retire, or Take a loss by cashing in your depreciated money in the Stock Market. What is interesting is that when stock markets fall, bonds rise. As money never really leaves the market, it just moves around in the market. By using a Bond Fund, if the market is down, you can let your stock market assets sit there, and simply take your retirement funds out of the safety of the Bond Funds. And when the market recovers you can start drawing off your stocks again. Simple.
5. Bond Funds can be re-invested in the stock market when a recovery occurs, or when Interest Rates rise.
When you actively watch or manage your money, as we do here for our clients, you still have control over the RRSP and how it is invested. If we agree the Toronto Stock Exchange is on the rise, we can move some of the Bond Fund Assets into the stock market to try and beat the 5%. As well, if Interest Rates start to rise consistently, then again we can move the money out of the safety of the Bonds, and back into the markets.
One of the things you should realize is that someone needs to be Guiding you through the cycles of your RRSP investing life. When you are younger the ability to recover from a market crash in time for your retirement years is much easier, but as you get older, you must be as protective as you can and avoid the dramatic swings of your RRSP account.
As there are only two outcomes of being too risky with your RRSP in your Retirement Risk Zone. Either can't retire when you wanted to, or you have to live on less if you do choose to retire. Talk to us today, and we will show you how we can help you protect your money.
If 2011 were any indication of the volatility in the world of Investing, then read further to Learn about how you can Protect your RRSP in 2012.
Step 1. Look at using Segregated Funds instead of Mutual Funds.
Segregated Funds are pools of assets similar to Mutual Funds, but with many significant benefits. The first benefit of a Segregated Fund, are the Guarantees they carry. The first powerful guarantee is the Death Benefit Guarantee. This Guarantee will return all of the deposited assets to the beneficiary, even if the account value has dropped. This is one of the best ways to protect your RRSP against the timing of death and volatile market values. If a client had deposited $100,000 into a Segregated Fund, and passed away when the market value had been depressed to say $70,000, the beneficiary would receive the entire $100,000 back. If this same deposit was in a Mutual Fund, the beneficiary would only receive $70,000 back. The other powerful Guarantee is the Maturity Guarantee. You can have a Maturity Guarantee of either 75% or 100% of your initial deposit. This means that after 10 years, if the market is in decline, you can still withdraw your initial deposit, even if the market is down.
Step 2. Consider a GMWB Guarantee on your RRSP.
A GMWB or Guaranteed Minimum Withdrawal Benefit helps our clients think about Income, and not just Savings. A GMWB acts like a personal pension, whereas you get a minimum rate of return inside the Investment Account, which is credited towards your Income. This allows you to receive a 5% Guaranteed Income Bonus every year you are invested, or the market value, whichever is higher. This way you can actively participate in the Stock Market, but get a base Guarantee of 5% if the Market does not perform well, or even loses money. This type of powerful guarantee has been incredibly well received by our clients in 2011. Because even though the market fell -12% in 2011, our clients Income Base was increased by 5%, try doing that with a Mutual Fund or GIC. Also by using the GMWB strategy, when you turn your Savings into Income at retirement, because it is a personal pension, you are guaranteed to receive Income for Life, no matter how long you live.
Step 3. Reset the Value of your Segregated Fund Accounts.
Another one of the many benefits of a Segregated Fund, is its ability to Reset your Initial Deposit. This means that not only is your initial deposit guaranteed, but even the interest it accumulates can be guaranteed through resets. In the first step we talked about the account declining from $100,000 to $70,000, but if the markets are in a rise, and the value of the account had increased to say $125,000, then your new guaranteed amount would be $125,000, and it can never go down, no matter what happens in the market. So if you have Segregated Funds, and your account value is higher than your original deposit, make sure to reset your guaranteed amount. This is a great way to protect your RRSP.
Step 4. Check your Beneficiary Designation.
Did you know that many Mutual Funds do not have a Beneficiary Designation? You also cannot make a beneficiary designation on a GIC or Term Deposits. If you were to pass away without having a proper beneficiary designation, you could be putting your spouse through a lot more work and effort than they need to be. It is a very simple process, and it stays outside of the Will, so that the assets can flow directly and efficiently to your Beneficiary (Generally your Spouse). By using a beneficiary designation, and Segregated Funds, you can bypass Probate on the account by using a Beneficiary Designation. So its not only a smart thing to do, but will also save your estate thousands of dollars in Probate and associated Fees.
Step 5. Be Conservative in 2012.
Many times we meet with a client who does not understand their RRSP Investment Account, or how the money is actually invested. This is the number one mistake people make, and this is why portfolios are down across the board. You must understand how your money is invested, and how much of it lives in the volatility of the Stock Market. A good Conservative mix should be built similar to this, Bonds/Dividends/Equities. This way you have a good base of solid income through your Bonds, a good Dividend Fund with a strong track record will be the next riskiest Investment, and finally an Equity component will help you keep up with inflation. Even if you are in a bad Market, you can draw your income off of the Bond and Dividend component of your portfolio, and let the Equities recover. This way you never really "lose" money in the markets other than on paper, but it does not have to affect your Income or your Lifestyle.
By following the 5 Steps above, you should be able to weather the storm, and face any challenges that the Stock Markets throw at you. If you need help in implementing any of these strategies, please give our office a call. It can make the difference between worrying about your Account, or being able to sleep at night, no matter what bad news is shown on the Evening News...
Tip # 1.
Put your savings program on a systematic monthly withdrawal. If you invest every month into an RRSP you will win through the laws of averages. This means that you will buy more units of the Investment when the price is low, and less units of the Investment when the prices are high. Historically over the last 50 years, this has been the best way to get better than average return than making one lump sum deposit once in the year.
Tip # 2.
Contribute to your Spouse's RRSP as well. It is one of the area's we see a couple lacking in. If a Husband and Wife want to make contributions into an RRSP, it should be done with some sense of equality. Even if one of the partners in the relationship does not work, they can still have an RRSP, but it would be a spousal RRSP. That way both can accumulate RRSP assets in their own name. And the tax credit is still given to the working spouse, for tax purposes.
Tip # 3.
Combine your many RRSP accounts into one. Throughout life people tend to have a few RRSP Accounts out in the financial world. Sometimes you have an RRSP account with an old employers group RRSP, and one at one Bank, and another at another Bank. By combining all of your assets into one nice and neat RRSP account, you will be able to save on fees and truly keep your eyes on your RRSP account balance. If you have a bunch of scattered accounts, chances are you are not managing them properly and consistently.
Tip # 4.
Whatever you do not use today, will accumulate for your future. One of the great features and benefits of an RRSP structured savings account, is that if you do not use all of your RRSP room this year, it will carry forward to next year. Currently the maximum amount you can contribute to your RRSP for the 2011 Tax Year is 18% of your income, up to a maximum of $22,450. But if you only have the means to contribute $10,000 this year, the unused $12,450 will carry forward to future tax years. That way if you receive a large lump sum of cash in the future you would like to use for your retirement, you can deposit more than the maximum because of the carry forward. This works well for inheritances and unexpected bonuses.
Tip # 5.
Be conservative with your money... In these dire times of financial instability, it is more true than ever to have a proper investment mix, that matches your comfort level and timeline for investing. A good mix of Bonds, Equities and Smaller Companies have allowed our clients to retain their principle in these very difficult and turbulent times in the market. We also work with Guaranteed Products who give a Guaranteed return of 5% or the Market value, whichever is greater. This allows you to sleep at night, when the markets are in a downturn, yet participate in the success when the markets are going up.
By using these simple tips, you should be on your way to understanding how to best maximize your RRSP portfolio, and protect it from market volatility whenever possible. There are many more ways we can help you maximize the value of your RRSP in retirement, such as leveraging, RRSP Loans and Aggressive Portfolio strategies. Simply call our office today to get a head start on the RRSP season, and the stability of your Financial Future.