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retirement savings

Investing

RRSP Retirement Savings Tips for 2010

1. Start contributing today into your RRSP for the 2010 tax year rather than waiting until the last minute to contribute. If you can’t afford a lump sum contribution, start up a preauthorized contribution that comes directly out of your bank account on the same day that you get your paycheck. By investing regularly throughout the year instead of contributing a lump sum at the RRSP deadline, your money will have more of a chance to grow for you, and will significantly impact your returns over the long term.

2. If you think you will earn more money in future years, consider deferring your tax deductions until a later tax year. Just because you contribute in 2010, it doesn’t mean that you have to benefit from the tax deduction in 2010. Save it for a year that you expect your marginal tax rate to be much higher. For instance, full time students with part time jobs who want to start saving for retirement, will likely benefit from deferring their tax deductions.

3. Take advantage of a spousal RRSP if you expect your spouse’s income to be lower than yours when you reach retirement age. By splitting your income it will result in a lower tax bill in the future.

February 5, 2010

Book Reviews

Want To Know How To Retire Rich?

How To Retire Rich; Time Tested Strategies To Beat The Market And Retire In Style by James O’Shaughnessy

How to Retire Rich is a an easy-to-read book about investment strategies that will help you to reach your retirement goals. The author, James O’Shaughnessy, is a mutual fund manager and an experienced investor who has studied the history of the market for the past 45 years. Based on in-depth research, he has developed solid investment strategies and has shared them in his book.

He uses four different couples at different life stages to illustrate how the various investment strategies can be streamlined for every situation. By doing so, it makes it easier for readers of all ages to identify with what he is saying.

Some key points outlined in the book are that investing in the market is extremely important if you want to retire rich. Instead of being afraid of market fluctuations, the author says we should be afraid of losing purchasing power if we insist on investing in cash and other “safe” investments. Although knowing that your principal is guaranteed may give you peace of mind today, knowing that your money will be worth so much less in the future should motivate you to consider other options.

According to O’Shaughnessy’s research, the New York Stock Exchange has gone up 71% of the time in the past 45 years. He continuously emphasizes that the only way to retire rich is to invest in the market and that informed investors realize that day-to-day gyrations mean almost nothing in the long term. The important thing is to not get overwhelmed by current market fluctuations but to focus on the future and understand that the value of your investment will ultimately grow over the long term.

An interesting point in the book is that successful investing runs contrary to human nature. The author says “The reason most people don’t retire rich is that it’s simply too hard to keep their emotions in check and stay focused on the long term.” Once we are able to accept that the value of our investments will fluctuate and discipline ourselves to stay invested, we will be set up for success and will ensure that we don’t lose the purchasing power of the money we have worked so hard to save.

I would highly recommend that you read this book if you are interested in learning how to develop a solid investment strategy for your retirement. O’Shaughnessy provides practical tips on choosing individual stocks to create a portfolio. He also discusses the benefits and disadvantages of mutual funds, and provides recommendations based on historical research. It’s a book that will encourage you to stay invested in the market even in the event of a market crash or an economic downturn. Check out this book and start implementing the strategies today.

December 1, 2009

Investing

How Much Should I Contribute to my RRSP?

We are all becoming more and more aware of the importance of saving for retirement. Unfortunately, many people have no idea how to go about it. Some people say it’s best to try to max out your RRSP (Registered Retirement Savings Plan) contribution space each year. I disagree. Instead, I recommend contributing enough to take advantage of a lower tax bracket, and then contributing to a TFSA (Tax Free Savings Account) or a non-registered investment account (IA) to supplement additional retirement savings.

I say this because the main advantage of contributing to an RRSP is the tax deduction and the tax-deferred growth. If contributing $4000.00 in a given year brings you to a lower tax bracket, there is no need to contribute anymore than that since you have already maximized the tax benefits.

On the other hand, that doesn’t mean that you shouldn’t be building up your retirement savings in other ways such as by contributing to your TFSA (up to $5000 of additional contribution space is added each year) and/or contributing to a non-registered investment account.

Once you’ve determined how much you need to contribute to your RRSP, if you still have funds remaining that can be used for retirement savings, I would suggest building up your TFSA, because you don’t have to calculate your capital gains or losses, and more importantly, you don’t have to pay tax on your earnings. It is also much easier to withdraw from a TFSA if the need arises.

Before deciding on how much to contribute to your RRSP, I would highly recommend checking out http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html on the Canada Revenue Agency website to see exactly how much you should contribute to maximize your tax benefit. After that, if you still have room in your budget, consider putting some money into a TFSA and then an IA and set yourself up for success.

For more detailed information on RRSP related topics, check out my RRSP Page. You can also check out my e-book about RRSPs.

November 27, 2009

Debt

Is It Better To Pay Off Your Mortgage or Contribute To Your RRSP?

This is an age-old question and after doing some research on the subject, I have discovered that there are a lot of differing opinions out there. Some say you should pay off all your debt before contributing to an RRSP, while others suggest making RRSP contributions when you are young and then focusing on paying down your mortgage when you are older.

The answer to this question, however, really depends on you and your own personal comfort with debt. There are a lot of people out there who absolutely despise being in debt and will do everything in their power to get out of debt, while others are okay with being in debt, at least to a certain extent.

When considering what to do, it’s a good idea to talk to a tax specialist and/or a financial planner. Sometimes people end up doing ridiculous things in order to avoid paying tax, so it’s important to consider all aspects rather than simply focusing on reducing the amount of tax you pay.

Some specific things to consider when choosing between saving for retirement and paying off your mortgage include your age, current tax bracket, investment returns, mortgage interest rate, and whether or not you have a pension plan.

After skimming through several articles on this subject, I noticed that most people suggest doing both. That way you will feel as if you are getting somewhere, since simply paying down debt is supposedly not as psychologically satisfying. Another opinion I stumbled upon was that it’s better to pay off your mortgage first if your mortgage interest rate is equal to or higher than your RRSP’s rate of return.

It really all boils down to what you deem is most important for your own personal situation. If you want to read chartered accountant David Trahair’s opinion on why you should pay off your mortgage before contributing to an RRSP, check out this link.

If you have come across some extra money due to an inheritance, etc., I would encourage you to do your own research prior to making a decision. There are pros and cons to both sides and it may be wise to do both simultaneously. As the saying goes, it’s not a good idea to put all your eggs in one basket. On the other hand, sometimes it makes the most financial sense to choose one over the other.

November 19, 2009

Wealth

Pay Yourself First

What does it mean to pay yourself first? Rather than taking care of your bills and expenses each month andthen seeing if you have any money left over to invest and save, paying yourself first means you put aside some money for saving/investing as soon as you get paid! If you do that, then you know you will be able to tuck some money away for retirement as well as build up an emergency fund.

An easy way to pay yourself first is to set up an automatic withdrawal from your checking account on the same day you get paid. That way you won’t even miss the money because it will be like you never had it in the first place.

Even if you are on a tight budget it is important to pay yourself first. It may seem impossible on paper, but you need to do it. In Rich Dad Poor Dad, Robert Kiyosaki talks about a time when he and his wife had almost no money but they still insisted on paying themselves before paying their bills. Their bookkeeper at the time thought they were nuts. But look at them now! They have successfully learned what habits contribute to building wealth.

If you’re not already paying yourself first, I recommend that you take some time to look at your budget and set up an automatic withdrawal each month to start saving and investing for the future, even if all you can do is put aside $25 per month. It’s better than nothing, and as you progress you can increase the amount you invest.

August 21, 2009

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