Everybody says you should save for retirement. The problem is they don’ttell you when to save, where to save, or what to save. So here are my 5Commandments to Retirement Saving:
1.Thou shalt save a lot when you can, but not when you can’t.
This meansthere are periods in your life when saving is much easier than others. Don’tfeel so guilty about not being able to save much during your most expensiveyears. Usually the best times for saving would be before children, and afterthey are out of the house. This doesn’t mean you should not save for 25 yearswhen the kids are around. What it means is that if you are 29, married, have nokids and two full-time jobs, you might be in a position to save a lot of money.Let’s say your combined incomes are $130,000, your after-tax income is$100,000, and your expenses are $65,000 a year. There is an opportunity to save$35,000. This savings will be very powerful because it has so many years togrow before retirement. At 39, with two kids and a big mortgage, you could bemaking $180,000 but your after-tax income might be $130,000, and you might bespending $120,000 a year, leaving $10,000 for savings. The large savings yearsmight not happen again until you are over 55.
2.Thou shalt not contribute to RRSPs if your income is under $42,707.
While thenumber will change a little each year, the message is the same. It doesn’t makesense to use an RRSP if you are in a very low tax bracket. The reason is thatyou still must pay tax on every dollar coming out of an RRSP, and there is adecent chance that in retirement you might end up paying a higher tax rate thanthe 20% or 24% refund you received when putting the money in. If you have a lowincome in a particular year (or every year), it is usually better to putsavings in a TFSA or if you have children, in their RESP (if you are going to haveto help pay for their education anyway).
3.Over the long term, stock markets go up. Do not be afraid to invest in them.
The generalrule is that you should be quite aggressive with your long-term investments.Over a 30-year period, a 7.5% return will leave you with twice as much money asa 5% return. Over 60 years, it will be worth four times as much. Believe it ornot, for some of today’s young investors, they really do have a 60-year timehorizon. If you are 30 years old, even if you retire at 60, the purpose of yourretirement savings is to last you the rest of your life. That means that whilea small part of your investments have a 30-year horizon, some will actuallyhave a 60-year time horizon if you live until 90. This might mean a 30-year-oldshould have 80%+ of their retirement investments in stocks, and less than 20%in cash and bonds. While the portfolio should get safer as you get older, inmost cases, people should invest their long-term retirement money moreaggressively than they do.
4.Thou shalt never forget about taxes.
As yourwealth grows, taxes become more important. Even for those without great wealth,one simple but little-known rule is that dividends on U.S. stocksface withholding tax in a TFSA, but do not in an RRSP. Therefore, if you haveboth an RRSP or RRIF and a TFSA, hold your U.S. stocks in the RRIF or RRSP. Ifyou have enough wealth that you also have meaningful non-registered or taxableinvestments, you want to maximize the benefits of the tax-sheltered accountslike a TFSA or RRSP. The basic rule of thumb would be that investments withhigh income (whether dividend income or interest income), should be held in atax-sheltered account, and lower-income investments should be held in thetaxable account. In addition, all things being equal, Canadian stocks — whetherthey pay dividends or not — should aim to be held in your non-registeredaccounts if there is room, rather than in your TFSA or RRSP. This is becauseCanadian dividends face a much lower tax rate than interest income. The goal isto hold the same investments across your entire portfolio, but hold them inaccounts that will leave you paying the least amount of tax.
5.Thou shalt not panic at deadline time.
It is trueyou may miss out on a tax benefit if you miss the RRSP deadline, but it is onlytemporary. If you put funds in after Feb. 28, you will still get all of thesame benefits, but the impact on your tax return will take an extra year. Whatyou don’t want to do is to simply put the funds in to get the RRSP credit, butleave the funds in cash or money markets for months or years at a time. It isbetter to take the time to plan your retirement and then the appropriateinvestments, rather than make a mad dash to get funds in but not have aninvestment plan.
Ted Rechtshaffen is president and wealthadvisor at TriDelta Financial, a boutique wealth management and planning firm.