RRSP season is in full swing. As the March 1st deadline approaches, we’re bombarded with countless RRSP advertisements. The big banks roll out the red carpet to encourage RRSP contributions, but what about retirees?
While low interest rates are welcomed if you have debt like a mortgage, they’re hurting those who depend on their investments for their fixed income – including retirees who depend on their saved nest eggs. A recent CIBC poll found an overwhelming majority, 42 per cent, are not satisfied with their investment returns; only 10 per cent reported feeling positive about their investments’ performance. As today’s record low interest rates show no sign of changing any time soon, what’s a retiree to do?
A Retirement Boom is Only the Beginning
Nearly a quarter of Canadians are expected to reach their golden years by 2036, as baby boomers leave the workforce in droves. Retirement is an important stage of life to prepare for – with retirees now living 30 years or more, retirement can last as long as your career. It’s important to understand retirement is a two part game. While you’re working you should be putting money aside for your retirement. Once you finally reach retirement, it’s important to manage your investment portfolio to ensure your money lasts. While the banks tend to focus on RRSPs, some retirees feel they are left in the dark when it comes to managing their portfolios.
Low Risk Investments Have Risks, Too
Retirees may be unhappy with their investment returns, but that doesn’t seem to be changing their investment strategy. Over 50 per cent of respondents in low risk investments cited risk as their main concern. While low risk investments like GICs provide a guaranteed return, everything has its price. A lot of low risk investments aren’t keeping up with inflation, which means retirees are losing purchasing power over time. Think of it as compounding in reverse – subpar investment returns can put a real dent in your retirement nest egg over the long run. Just like when they were saving, it’s important for retirees to continue to diversify through balanced portfolios. If retirees want to achieve returns that keep up with inflation, they’ll want to invest in different types of investments in different parts of the world. The TSX was one of the weakest performing stock market indices in the world in 2012, which further shows why it’s important to invest globally.
Your Investment Portfolio in Retirement
It’s crucial for retirees to plan how they’ll spin down their investments in a tax efficient way during retirement. Retirees need growth, too – the days of generous pensions with indexing are fading. Now that you’re retired take advantage of your newfound free time to management your investments. It’s a good idea to regularly meet with a financial advisor to make sure you’re on track for meeting your retirement goals. You don’t want to pinch your pennies when you don’t have to or risk outliving your money.
You’ll have to carefully plan how much you’re going to withdraw from your RRSP or RRIF each year. Withdrawing your entire RRSP in one year is usually not advisable, as it will usually put you in the top marginal tax bracket. Income tested benefits like Old Age Security and Guaranteed Income Supplement can be fully clawed back without proper retirement planning. TFSAs are a great investment option for retirees – not only are your investment gains tax-free, they don’t count towards government tested benefits.