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Nine key questions to ask about your RRSP

by Wayne Cheveldayoff, 2007-01-04


As we head into RRSP season, here are nine key questions to ask to ensure you are on the right track.

1. Are you contributing enough to your RRSP to carry you through to your current average life expectancy of roughly 80 years? Old Age Security and maximum Canada Pension Plan pension combined is currently about $1,350 per month. Even adjusted for future inflation, it is doubtful that will be enough for a comfortable retirement. If you donít have an employer pension plan, the sooner you start building your RRSP, the greater is the chance you will have what you need. For example, if you begin saving $10,000 a year at age 25 and your RRSP investments compound at 8 per cent a year, you will have $2,797,810 at age 65. It sounds like enough, except that if we have 2 per cent inflation over that 40-year period, it will only be $1,267,101 in real dollars net of inflation. Carrying on the example, if you start to save $10,000 at age 35, you would have less than half -- $1,223,459 ($675,435 real) -- at age 65. If you start at age 45, you will have only $494,229 ($332,602 real). To figure out what your current RRSP savings approach will yield at retirement, check out the calculators at a financial website. The above examples were generated by the Growth Calculator at www.fidelity.ca.

2. Do you have the right investments? You want the best return possible, given the risk you are comfortable with. It is harder to do since the proposed changes to income trust taxation, but it is still possible with conservative trusts and equities to generate the 8-per-cent compound annual return cited above, but not if you stick only with government bonds and GICs yielding 4-to-5 per cent.

3. Is your portfolio properly diversified? Having only Canadian stocks and bonds is too much in one pot. Ideally, you will have investments in a variety of asset classes, such as commodities, including precious metals, and international equities, particularly in Asian countries where growth will be strongest.

4. Are you using a disciplined approach for selection of securities for your RRSP? The key is to let your winners run and to quickly get rid of your losers before they do too much damage to your portfolio.

5. Are you making good use of a spousal RRSP? Federal tax changes allow splitting of pension income after age 65 but spousal RRSPs still make sense for a variety of reasons, including the splitting income for tax savings prior to age 65.

6. Does your RRSP need protection from creditors? This is an important question if you are self-employed or in an occupation where you may be sued. Except in Saskatchewan and PEI, RRSPs are still totally vulnerable to creditors, unless they are considered insurance (such as segregated funds offered by insurance companies). The federal government passed legislation that would exempt a limited amount in your RRSP if you go bankrupt, but it is still not in effect.

7. Have you minimized expenses in your RRSP? It is another place where banks and brokers 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 an annual management expense ratio (MER) in the 2.5-per-cent range, be sure your returns at least match the index, or else perhaps you should be in index-linked exchange-traded funds (ETFs) where MERs are generally less than 0.5 per cent.

8. Have you properly designated a beneficiary for your RRSP? If you designate your spouse, your RRSP at your death will roll over tax free to your spouse. Otherwise, your entire RRSP will be taxed as your income on your final tax return.

9. 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 are required to fill out a know-your-client (KYC) form that sets out your risk tolerance and justifies the kind of investments Ė from speculative to conservative Ė that could be in your portfolio. Insist on seeing your KYC and on approving it and any changes to it in writing. Itís 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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©2007 Wayne Cheveldayoff