Smart Guide: revisiting your RRSP

Get the most mileage out of your investments

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You don’t need to be a weatherwoman to know that an RRSP blizzard is coming your way. Advertisers are issuing warnings; a flurry of calls is coming from an eager broker you want to ignore. Yet you feel as though you’re slipping up because you’ll never have enough money for your retirement. After all, it’ll take more than a DVD box set of The Simpsons and a bag of SunChips to sustain a retiree through her golden years. But plowing all of your savings into a tax-sheltered mutual fund is only one answer to your future. We have a few other suggestions that are closer to home than you’d imagine.

Invest in a house

Other than the RRSP, the great Canadian tax shelter is the primary residence, especially when the owner has paid off her mortgage. As a house’s value edges skyward, so does a potential seller’s retirement kitty; since our government doesn’t touch the capital gains we make on selling a house, it’s a sound, tax-free investment. Hey, even if that greying homeowner decides not to unload her home, she’ll still come out on the winning end: Her retirement expenses are fewer because the house is paid off, so she won’t need to generate as much income and won’t have to pay as much income tax.

Let’s take a look at Laura and Ashleigh, whose incomes are roughly equal. Laura makes her maximum RRSP contribution ($12,500) but never buys a home. Ashleigh, on the other hand, contributes only $2,000 per year to an RRSP so that she can pay off her $200,000 mortgage in 15 years.

Once Ashleigh pays off her mortgage, she pushes those payments into her RRSP. If the value of her home increases by five per cent each year (the average rate in the past decade), and they both generate returns of six per cent on their RRSPs, here is what their net-worth statements will look like after 25 years.

Ashleigh is now mortgage-free, but Laura’s rent has bloated with inflation (two and a half per cent per year) to $2,039 per month. And when Laura withdraws money from her RRSP to pay her rent, the Canada Revenue Agency takes a cut, while the value of Ashleigh’s home is non-taxable.

All this talk about home-buying may sound demoralizing for residents of pricey cities such as Calgary, Vancouver or Toronto: A home that devours more than 40 per cent of your gross pay is hardly affordable. Still, now is the best time to start planning and accumulating a down payment.

Invest in your own slush fund

You don’t have to be a shady politician to have your own secret stash of cash. Savings in an amount equal to six months of living expenses, lodged comfortably in a high-interest savings account, is an unbeatable investment return – with zero risk. Look for interest returns in the 3.75 per cent range. ING and PC Financial boast the best rates, but see what local credit unions offer as well. Before signing on the dotted line, check the fine print: There should be no minimum balance requirement or fees, and the balance should be insured up to $100,000. If in the end you decide to ignore all that rainy-day booty, it will still be a big boon upon retirement: A $20,000 fund will be worth more than $50,000 in 25 years.

Invest in a couch-potato portfolio

Traditional mutual funds are the most popular investment option in Canada, but they’re also accompanied by alarming management fees. A low-cost alternative is the “couch-potato portfolio,” a term coined by finance writer Scott Burns to describe a low-cost combination of funds that reflect the performance of a basket of stocks or bonds. For example, if you want to invest in the Canadian market, the iShares Canadian Composite Index Fund provides a portfolio of leading companies. In contrast to the 2.68 per cent a year mutual funds charge for their management fees, iShares charges 0.25 per cent. After 25 years, that miniscule spread adds up. Invest $2,000 each year with six per cent returns, and the difference will add $29,881 to your nest egg. You can buy iShares through discount brokers or shareowner.com.

Invest in your friends and family

We all worry about not having enough money to live comfortably in retirement, but when asked about their greatest challenge, senior citizens cite loneliness. In an effort to create a more poignant sense of community, and to avoid the issues of a prohibitively priced real-estate market, co-housing is becoming a popular solution on the West Coast. If you can’t afford your own digs, consider going in on a place with friends or family, or start a communal home-development project with a group of like-minded people, whether they wear love beads or not. For more information, visit cohousing.ca. Vancity offers a Mixer Mortgage which, among other things, allows buyers to share ownership costs and expenses.

Invest in your debt

If you feel as if you’re an indentured servant to your creditors, it’s time to re-evaluate your relationship with your plastic. Make a list of everything you owe, starting with the largest outstanding balance. Include your minimum payments and the interest rate you’re paying. Compare the total of your minimum payments to your net monthly income (the amount that hobbles into your bank account after taxes and deductions). If your debt payments are more than 40 per cent of your monthly income, and you’re finding it difficult to keep up with payments, make an appointment with an accredited credit counsellor. If they don’t, you should still prioritize your repayments: After making your minimum payments, always apply any extra money toward the highest-interest account.

You can also transfer your outstanding balances to the lowest- rate account available to you. (This can become a bad habit, and if you find yourself transferring balances more than once, you should consider making an appointment with a credit counsellor.) Lowering the interest you have to shell out each month can slash years off your repayment schedule and spare you thousands of dollars. But be sure to read the fine print about the terms of the introductory period: You don’t want to be stuck with an extortionary rate after it ends. PC Financial’s MasterCard charges 3.97 per cent on balance transfers until you’ve paid off the total transfer amount.