As Canadians start preparing for retirement this registered retirement savings plan season, they will no longer just be seeking one way of investing their hard-earned dollars, instead they could be looking at ways to diversify their portfolios to achieve the highest return on their investment.
“Long-term guaranteed rates on GICs (guaranteed investment certificates) and fixed income are the lowest they’ve been in 50 years,” said Kerry Auriat, investment adviser and vice-president at National Bank Financial in Brandon. “As a result of that, what people are doing is, they’re looking for other ideas.”
Some options that you should consider investing in, along with your RRSP, include T-Series Funds, structured products that provide some type of guarantee as well as a high cash flow, GICs or bank shares that yield as a dividend, Auriat said.
“These are things that we should be looking into absolutely before they retire, while they’re contemplating retirement, what their cash flow is going to look like and many years prior to retirement to know how much money they’ve got to put aside and then finally when they hit retirement,” Auriat said. “All of a sudden what’s happening is people are having to review the simple ideas behind how they manage their portfolio in order to generate adequate cash flow for retirement.”
Although Manitobans receive one of the highest marginal tax rates at 46 per cent, they only receive 2.75 per cent in return, Auriat said.
“Meaning they’re getting an affective rate of return at about 1.5 per cent, but inflation is two per cent, so you’re actually losing money, even though it’s guaranteed because you’ve got inflation and taxes eating away at your returns,” he said. “So this is why people are seeking out different approaches to an investment portfolio.”
Auriat said that while your return rate is dependent on several things, they mainly stem from what your goals are combined with your tolerance for risk, something that your financial adviser can help you figure out.
“Some people can’t stomach taking too much risk … what we’re going to do with that client is construct a portfolio that’s going to have much more of a guaranteed element to it.”
But then there are other clients who are comfortable, who have good pension plans to fall back on and can be more aggressive, Auriat said.
“Individually what you’ll have to do is sit down and do a review and think about what you need,” he said.
Auriat compares an individual’s tolerance for risk and goals to a barbell. On one end lies the weight that represents a 100 per cent guarantee on your investment while the other end contains your level of risk, somewhere in between lies the bulk of clients, Auriat said.
“Somewhere in that barbell is each one of us … so as a result of that, each of us has a different risk tolerance,” he said.
Auriat says once you’ve found your comfort level, that is when you can start building your own portfolio.
“Younger people could have the ability to be more aggressive while someone older might not want to take that risk.”
The latest time to pull out of an RRSP is at the age of 71, but nowadays some investors are choosing to withdraw earlier for several reasons. Some of which include the First-Time Home Buyers’ Plan or the Lifelong Learning Plan, both are provided through the Government of Canada.
“Sometimes you’ll want to borrow money from your RRSP to invest in yourself, whether it be through a house or through something like a higher education,” Auriat said.
Some Manitobans are also choosing to retire earlier and require some sort of cash flow to do so.
“It’s a very unique business, so the products are one thing but the reality of the broader story is that it tends to be an incredibly unique series of variables,” Auriat said.
But since the rates are the lowest they’ve been in 50 years, yields went from about 2.1 per cent to 1.6 per cent, Auriat said, it’s causing investment professionals like himself to start thinking outside of the box when helping clients diversify their portfolios.
“It forces us to work a little bit harder to think of different alternative investments that are going to provide the kind of yield that people need,” he said. “It also forces us to be a little bit more on our toes to try and find those securities, or it forces you to be more accepting of what the rates are or maybe you have to save more.”
So this RRSP season, whether you are in a position to take risks or want to find a way of making a more stress-free investment with a guaranteed return, one way to do it is by adding to your RRSP and diversifying your portfolio so that you can retire comfortably.
Republished from the Brandon Sun print edition February 11, 2013