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By Ray Turchansky
The Vancouver Sun
RRSP Investing Section
Thursday, January 29, 2004
Many people may make the most important contributions to their registered retirement savings plan in the last few years before retirement.
“The last five years in most cases will be the highest-earning years for them, so definitely RRSP contributions are very critical, their tax refunds would be the highest,” says Agnes Branecka, an investment representative.
Adrian Mastracci, investment counsel and
president of Vancouver based ‘fee-only’ KCM Wealth Management, says, “If you don’t like what you hear from somebody, get a second opinion, because you don’t have much time to recover from mistakes.”
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| "Leaping into the RV life without a plan doesn’t always make for a smooth retirement — as Jack Nicholson’s character discovered the hard way in About Schmidt." |
Investors approaching retirement may take advantage of higher RRSP contribution limits of $14,500 for 2003 (based on 18 per cent of earned income of up to $80,556 in 2002).
“People need to understand that their life is changing extremely,” Branecka says of retirement. “They will have less money and more time — that’s a very bad combination.
“As people get older they really need to get an element of fear, of where’s the money going to come from.”
Debbie Ammeter, vice-president of advanced financial planning suggests seeing a financial planner within a few years of retirement.
“They’ll want to know when you want to retire, what you want your retirement lifestyle to be, how much money you think you’ll need, what are your sources of income, and if there’s going to be a shortfall,” says Ammeter.
Adrian Mastracci, a financial advisor with KCM Wealth Management Inc. in Vancouver, says a lot of people approach retirement without a game plan and then “it’s like having a hurryup offence in football.”
“If you don’t like what you hear from somebody, get a second opinion, because you don’t have much time to recover from mistakes,” says Mastracci. “Every now and then I ask a client ‘how did you get into all these things?’ and they can’t tell you.”
One rule of thumb is to start rebalancing your portfolios as long as 10 years before retirement, in order to withstand any downturn in the stock markets.
If you’re heavily into equities as you approach retirement, you can shift existing funds from riskier to safer assets, or make your final RRSP contributions into low-risk instruments like T-bills, money market funds or GICs.
“If you did have a portfolio that you wanted to restructure, you may want to do that over time to avoid getting caught in down markets on the day you want to make a move,” says Ammeter. “If you’re moving part of your portfolio into another asset class, you may want to do that over several months or over a few years.”
The convention is to hold a percentage of equities equal to 100 minus your age — so a 60-year-old should have 40 per cent equities — and the rest in fixed income. But many financial planners have increased equity percentages now that people are retiring earlier and living longer, requiring them to grow a nest egg that can fund 25 to 35 years in retirement, instead of 10 or 15. “People become more conservative, but some go to a white and black solution, where they move everything from one site to another,” says Branecka. “The balanced portfolio should be the answer.
“Make contributions that will make sense five years down the road from the day the money is put in.” She suggests that people “play” at being retired, before they really are.
“I advise people, a year before going on a RRIF, try to live on the budget that they’ve constructed. If you were getting $5,000 a month but in retirement you will be getting $3,000, try living on $3,000 and see if you can do it. It opens their eyes with the choices they have about spending money.”
One axiom is that during your latter working years you should set up investments so your portfolio value will be the same after four years of retirement as it was when you retired. “People who have always invested for growth now find that they have to shift gears so the preservation of capital becomes fairly important,” says Branecka. “The fluctuations that they could live with, things going up and down 10 per cent, are not going to be good.”
But investing in RRSPs during their final working years may not be for everyone. Some people who already have huge RRSP accounts may be better off contributing to non-registered investments.
That option became much more attractive in 2000, when the federal government reduced the capital gains inclusion rate to 67 from 76 and then 50 per cent. That means you pay tax on 50 per cent of capital gains in non-registered accounts, whereas you pay 100 per cent on amounts you withdraw from an RRSP or a RRIF.
“Most times the tax-deferred compounding is going to win out, but it depends on rates of return and what your tax rates will be in retirement,” says Ammeter. “Most financial planners use sophisticated software, where they can put in those variables and come up with a projection to show what the differences would be.” Another suggestion is to combine RRSP plans in the years before your retire.
“It’s easier to keep track of instead of having RRSPs all over the place. It can still be spread out over asset classes, and with combined RRSPs you have simplified record-keeping and you can take better advantage of the (30 per cent) foreign content rule. And it can be simpler to convert to a RRIF.”
One step further is combining RRSP plans into a self-directed plan, which allows you to include safe, incomebearing instruments such as guaranteed income certificates and Canada Savings Bonds.
But who says you have to retire?
“A mistake is to assume that you should retire at a certain magic age,” says Ammeter. “Maybe working a year or two longer can make a big difference in giving you a pot to retire on. People shouldn’t be concerned with keeping up with the Joneses in terms of when to retire.”
Even Prime Minister Paul Martin thinks 75 is a fine age to retire.
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