The best mix of investments for retirement will boost your portfolio returns

best retirement investments

Discover the best mix of investments for retirement using our tips and you’ll have more to spend and enjoy

Top-quality stocks tend to lose less of their value in the kind of severe market setback we’re experiencing today. They also tend to bounce back nicely when conditions improve. These are the kinds of stocks we continue to recommend in our newsletters and other services.

To build a portfolio of those stocks—and to show the best long-term results, Pat McKeough still thinks you should stick with his three-part program:

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

Meanwhile, the best retirement plan you can have is to start saving as early in your working career as possible. After that, we recommend that you use our suggestions on the best mix of investments for retirement to maximize your portfolio returns.


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Use Registered Retirement Savings Plans (RRSPs) to hold your best mix of investments for retirement

RRSPs are a form of tax-deferred savings plan. RRSP account contributions are tax deductible, and the investments grow tax-free. When you later begin withdrawing the funds from your RRSP, they are taxed as ordinary income. RRSPs are the best-known and most widely used tax shelters in Canada.

A spousal RRSP is one way to achieve equal retirement income. Suppose you are the higher-income spouse. You can make contributions to a spousal RRSP, and claim the tax deduction. Note that your contributions to the spousal RRSP will count toward your annual RRSP deduction limits.

At the same time, your spouse can still contribute their full deduction to their own separate RRSP. When the money is withdrawn from the spousal RRSP years later, it is taxed in the hands of your spouse. That’s an advantage if he or she is still in a lower tax bracket.

Convert your RRSP into a Registered Retirement Income Fund (RRIF) as part of your  long-term retirement investment planning

Converting your RRSP to a RRIF is clearly one of the best of three alternatives at age 71. That’s because RRIFs offer more flexibility and tax savings than annuities or a lump-sum withdrawal (which in most cases is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income).

Like an RRSP, a RRIF can hold a range of investments. You don’t need to sell your RRSP holdings when you convert—you just transfer them to your RRIF.

When you hold a RRIF, you must withdraw a minimum each year and report that amount for tax purposes. (You may withdraw amounts above the minimum at any time.) Revenue Canada sets your minimum withdrawal for each year according to a schedule that starts at 5.28% of the RRIF’s year-end value at age 71, reaches 6.82% at age 80, and levels off at 20% at age 95.

If you have one or more RRSPs, you’ll have to wind them up at the end of the year in which you turn 71.

As an aside, over long periods, the total return on a well-diversified portfolio of high-quality stocks (or ETFs that hold those stocks) runs to as much as 10%, or around 7.5% after inflation. Aim lower in your retirement planning—5% a year, say—to allow for unforeseeable problems and setbacks.

The best mix of investment for retirement will focus on a long-term strategy like compounding

Compound interest—earning interest on interest—can have an enormous ballooning effect on the value of an investment over the long-term. It can be considered one of the best long-term investment strategies, despite the kind of broad market decline ushered in by the COVID-19 pandemic.

Note that the benefits of compounding can apply to dividend-paying stocks as well. When you earn a return on past returns, the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate. Reinvested dividend payments act in a similar fashion to compound interest.

Broad exposure is key to creating the best ETF portfolio for retirement

We still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio.

With ETFs, investors get the broad market exposure of a traditional mutual fund. The best ETFs also represent a low-cost, tax-efficient way for investors to make money in the long term.

The best ETFs have low MERs. The MERs (Management Expense Ratios) are generally much lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing their portfolios, ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.

ETFs have evolved over the last few years, and competition has increased. So, at the same time, you need to be very selective with your ETF holdings.

Here are three reasons to use ETFs in your retirement portfolio

  1. ETFs diversify a portfolio. Many successful investors build a diversified portfolio of conservative, mostly dividend-paying stocks spread out across most if not all of the five main economic sectors (Manufacturing & Industry, Resources, Finance, Utilities and Consumer)—or they could buy an ETF that invests in a similar way.
  2. Conservative ETFs cut your risk. Holding higher-risk stocks in your TFSA is a poor investment strategy because they come with a greater risk of loss. If you lose money in a TFSA, you lose both the money and the tax-deduction value of the loss. Conservative ETFs can be a good alternative.
  3. ETFs are flexible. If funds are limited, you may need to choose between TFSA and RRSP contributions, but ETFs can be used for either.

How has the COVID-19 crisis changed your retirement planning, if at all?

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