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Eight key questions to ask about your RRSP

by Wayne Cheveldayoff, 2006-01-05

As we head into RRSP season, here are eight key questions to ask to ensure you are on the right track to having what you need in retirement.

1. Are you contributing enough to your RRSP? Put another way, when you retire, will there be enough saved to carry you through to at least your average life expectancy – currently 82.4 years for women and 77.4 years for men. Old age security and the maximum Canada Pension Plan pension combined currently is only $1,329.21 monthly. If you don’t have an employer pension plan and want to have more than that, the sooner you start saving, the greater is the chance you will have what you need. If you begin saving $500 per month at age 25 and your RRSP investments compound at 8 per cent a year, you will have $1,632,264 at age 65. If you start the $500-per-month savings program at age 35, you will have less than half – $714,338. If you start at age 45, you will have only $289,160. To figure out what your current RRSP savings approach will yield at retirement or what you will need to maintain your lifestyle, check out the RRSP calculators at a financial website, such as www.mackenziefinancial.com.
2. Are you invested in the right things? You want the best return possible, given the risk you are comfortable with. It is quite possible at this time using conservative income trusts and equities to get the 8-per-cent compound annual return cited above, but if you are in bonds or GICs yielding only 4 per cent, you won’t do nearly as well. Also, you need to be earning a return substantially greater than the annual inflation rate.
3. Is your portfolio properly diversified? Ideally, you will have investments in a variety of asset classes, including equities, bonds, income trusts and commodities (like precious metals), and internationally. Too much in one pot is asking for trouble.
4. Can your portfolio withstand a further rise in the Canadian dollar? If commodity prices keep rising, the Canadian dollar could easily reach parity with the U.S. dollar. You don’t want to be invested in companies or income trusts that will do poorly in that event, and your international investments should be partly geared to countries whose currencies will also rise if the U.S. dollar gets weighed down by that country’s enormous trade and budget deficits.
5. What would happen to your portfolio if oil goes to US $100 per barrel? The world has run out of cheap oil, depletion is limiting supply, China and India are driving demand and a terrorist act could cause a sharp price spike. For insurance, you need some “black gold” in the form of oil company equities in your portfolio.
6. Does your RRSP need protection from creditors? This is not an idle question if you are self-employed with the risk of bankruptcy or in an occupation where you may be sued. Except in Saskatchewan and PEI, RRSPs are totally vulnerable to creditors, unless they are considered insurance (segregated funds offered by insurance companies). The federal government recently passed legislation that would exempt a limited amount in an RRSP if you go bankrupt, but if you don’t file for bankruptcy, creditors could still wipe it out.
7. Have you minimized expenses in your RRSP? Its just another place where banks have their hands in your pocket, so make sure you are getting value for money. If you are invested in actively managed mutual funds with annual management expense ratios (MERs) in the 2.5-per-cent range, be sure your returns at least match the index, or else perhaps to you should be in index-linked exchange-traded funds (ETFs) where the MERs are less than 0.5 per cent.
8. Is the relationship with your investment advisor in your favour? Trust is not enough. You need things in writing and you need accountability. Investment advisors must fill out a know-your-client form (KYC) for each client. It sets out your risk tolerance and justifies the kind of investments – from speculative to conservative – that could be in your portfolio. Insist on seeing your KYC, seek changes if it is wrong and hand your advisor a letter that from now on, any changes must be approved and signed by you. It’s your money.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.

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©2006 Wayne Cheveldayoff