There are some key ways to think about investing money in Canada that will help you make better decisions regarding your retirement income
Investing money in Canada for retirement starts with having the right Successful Investor mindset.
Some investors facing a retirement shortfall ask us if we can supply one last can’t-miss trading idea that can make up for the shortfall in their savings (brokers sometimes refer to this as a “rescue stock”). This, of course, is unrealistic. If we could find stocks with that rare combination of low risk and high potential, why would we ever recommend anything else?
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If you are investing money in Canada and are looking for a “rescue stock,” you should instead focus on safer investments
If you’re heading into retirement and are short of money, you should move your investing in the opposite direction: aim for safer investments, rather than taking one last gamble.
Here are two practical solutions to a pre-retirement money shortage. The funny thing is that either one can improve your quality of life in retirement, in addition to your finances.
The first solution is to work longer. Put off retiring from your current position, or continue to work part-time. Or find full- or part-time work in another field. To start, this can solve a common problem that many retirees fail to foresee: how hard it can be, and how much it can cost, to fill up all the free time that comes with retirement.
Many retirees admit that they fill this time by giving free rein to Parkinson’s Law (“work expands to fill the time allotted for its completion”). Some find that minor tasks take over their lives, so they never get to tackle the more fulfilling projects that they’ve put off till retirement such as learning another language, taking courses, organizing a stamp collection or whatever.
A part-time job, paid or volunteer, gets you out of the house and provides contact with other people. Many studies suggest these two fringe benefits can prolong your life and keep you healthy.
The second solution is to refine your spending. This is something you should begin before you retire. You start by doing a detailed study of how you spend your money now. Then, you analyze your findings to see what expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits like smoking.
Investing money in Canada for retirement: Why a Registered Retirement Savings (RRSPs) needs to be part of your plan
Here are two Successful Investor retirement investing strategies you can use to make the most of your RRSPs, both now and in the future:
Consider RRSP withdrawals only in years of little or no income: Making early withdrawals from your RRSP only makes sense when you’re in a low income-tax bracket, and you have exhausted all other means of income. That includes periods when you are ill, say, or unemployed.
If you still have funds left over after you’ve made a withdrawal, a good place to put them is in a tax-free savings account (TFSA). Like an RRSP, TFSAs shelter future gains from tax. But unlike RRSPs, withdrawals from your TFSA are not taxable.
Keep higher risk investments outside of your RRSP: We continue to believe that holding higher-risk stocks in your RRSP is a poor retirement investing strategy. That’s because if you hold them in an RRSP and they drop, you not only lose money, but you also lose the tax-deduction value of a loss in your RRSP. Outside your RRSP, you can use capital losses to offset taxable capital gains in the current year, the three previous years, or any future year.
You also lose the opportunity for tax-free compounding that the money would have enjoyed within your RRSP. This is a crucial part of successful retirement investing. That’s because, after about 7 years in an RRSP, the ability of an RRSP contribution to grow and compound free of tax is usually worth more than the initial contribution itself. That’s why RRSPs are a bad place for aggressive investments of any kind. The potential losses that these investments could suffer are just too costly.
Planning for the future while investing money in Canada is one of the most important things you can do while you’re still working. Our best retirement planning advice is to invest early and often—and don’t forget to use our three-part Successful Investor approach:
Invest mainly in high-quality, well-established companies, with a history of earnings if not dividends;
Diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
Downplay or stay out of stocks that are in the broker/media limelight.
What is your retirement looking like? Have you made any big mistakes in planning?
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