Invest in different types of investments for retirement: A diversified approach helps you keep more of your money over time
The best retirement plan you can have is to start saving as early in your working career as possible. You then invest a steady or rising amount of that money in the stock market every year. When you follow this plan, you automatically profit from dollar-cost averaging. You will automatically buy more shares when prices are low, and fewer shares when prices are high.
Today we are looking at different types of investments for retirement—plus the best places to hold them—that can be of benefit to Canadian investors.
Use our three-part Successful Investor approach to make the best choices in different types of investments for retirement
As part of our three-part philosophy, we think that you will profit most by spreading your stock investments out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities. This helps you avoid excess exposure to any one segment of the market that is headed for trouble.
The remaining two-parts of our approach are just as important:
2. Invest mainly in well-established, dividend-paying companies;
3. Downplay or avoid stocks in the broker/media limelight.
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Learn the benefits of holding different types of investments for retirement
Registered Retirement Savings Plans: Registered retirement savings plans, or RRSPs, are the best-known and most widely used tax shelter in Canada. The tax treatment of RRSPs is what sets them apart from other investment accounts. Ottawa created RRSP tax shelters to let Canadians invest money on a tax-deferred basis, presumably for retirement.
You can put money into RRSP tax shelters each year (up to a limit based on your income) and deduct it from your taxable income. You only pay income tax on your investment, and the income it earns, when you make withdrawals from your RRSP.
In a way, investment gains in RRSP tax shelters give you a double profit. Instead of paying up to 50% of your investment gains in taxes, you keep 100% of them working for you until you take money out.
Tax-Free Savings Accounts: Tax-free savings accounts (TFSAs) let you earn investment income—including interest, dividends and capital gains—tax free. But unlike registered retirement savings plans (RRSPs), contributions to TFSAs are not tax deductible. However, withdrawals from a TFSA are not taxed.
Here are two tips you can use to make sure you’re getting the most profit—and tax benefits—from your TFSA:
Avoid putting higher-risk investments in your TFSA: Holding higher-risk stocks in your TFSA is a poor investment strategy. That’s because high-risk stocks 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. (Outside your TFSA, you can use capital losses to offset taxable capital gains.) You’ll also lose the main advantage of a TFSA: sheltering gains from tax. You won’t have gains to shelter if the value of your investments falls.
Your current income can help you decide between contributions to your TFSA or your RRSP. If funds are limited, you may need to choose between TFSA and RRSP contributions. RRSPs may be the better choice in years of high income, since RRSP contributions are deductible from your taxable income. In years of low or no income—such as when you’re in school, beginning your career or between jobs—TFSAs may be the better choice. Moreover, investing in a TFSA in low-income years will provide a real benefit in retirement. When you’re retired, you can draw down your TFSA first, then begin making taxable RRSP withdrawals.
Registered Retirement Investment Funds (RRIFs): A RRIF is a tax-deferred retirement plan for your Registered Retirement Saving Plan (RRSP). RRIFs are used by those who don’t plan to cash out their RRSP as a lump sum when they retire, and prefer to extend their investment and take smaller withdrawals by converting to a RRIF. Registered Retirement Income Funds offer more flexibility and tax savings than annuities or a lump-sum withdrawal.
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. (Note that if you have one or more RRSPs, you’ll have to wind them up—including transferring to a RRIF—at the end of the year in which you turn 71.)
Bonus tip: Learn how the Canada Pension Plan (CPP) relates to retirement investing to help you plan better
The Canada Pension Plan, or CPP, is the name for the Canadian national social insurance program, which is one of the different types of investments for retirement. The CPP pays out based on contributions made through employment, and provides income protection for an individual or their survivors in the instance of retirement, disability or death. Since 1999, the CPP has been legally permitted to invest in the stock market.
Nearly all individuals working in Canada contribute to the CPP, unless they live in Quebec, where the Quebec Pension Plan (QPP) exists and provides comparable benefits.
Here’s a look at some of the pensions or benefits provided by the Canada Pension Plan:
Retirement pension
Post-retirement pension
Death benefit
Child rearing provision
Credit splitting for divorced or separated couples
Survivor benefits
Pension sharing
Disability benefits
Note: You don’t have to apply to both the QPP and CPP plans. You will receive benefits based on the location of your residence. The amount you will be paid takes into account any contributions made to both plans.
Eligibility of Canada Pension Plans: Applicants can apply to receive full CPP benefits at age 65. The CPP can be received as early as age 60 at a reduced rate. It can also be received as late as age 70, at an increased rate.
What do you do beyond stock investments to save for retirement?
What is one of the biggest mistakes you’ve made in investing for retirement?
Comments
Harry
What is better? Convert RRSP to RRIF at 65 or latter at 71. (I don’t need the money during this period)
My answer for Harry : there is no benefit for converting your RRSP to a RRIF at 65 ( such as there would be in taking your CCP later at 70 ) so leave your RRSP as is, especially as you do not need the money, and you remain healthy.
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What is better? Convert RRSP to RRIF at 65 or latter at 71. (I don’t need the money during this period)
My answer for Harry : there is no benefit for converting your RRSP to a RRIF at 65 ( such as there would be in taking your CCP later at 70 ) so leave your RRSP as is, especially as you do not need the money, and you remain healthy.
Thanks for your feedback.