In this article we talk about how Canadians can grow their retirement portfolio by boosting equity. Many Canadians are not taking advantage of the tools currently available to them and we will outline them further below.
Retiring without a pension fund comes with serious financial risks
Retirement could pose problems if you are not a member of an employer aided workplace pension plan. Registered Retirement Savings Plans (RRSP) remain a popular alternative for Canadians who want or need a private pension plan. But defined-contribution plans and defined benefit pension plans are also great options. All of these portfolio options allow you to boost your retirement equity, but none comes easier than a well-managed RRSP.
Many Canadians are not investing in retirement funds
Statistical information tells a sad tale. Out of every ten workers in Canada, only four take part in workplace pension plans. This shows that 60% of Canadian workers face the risk of retiring with lower savings.
Saving for your nest egg ensures a comfortable retirement
Certified financial planners say workers must save at least eleven times the value of their final salary by 65 years old. This increases savings to meet post-retirement expenses.
Why the RRSP is a good choice
The RRSP is a popular private pension plan because it can hold many types of investments in its portfolio, tax-free. If you’re considering saving for retirement, it’s important to start contributing as early as possible. The sooner you start contributing, the more you’ll enjoy post-retirement benefits.
Portfolio managers explain that RRSP investment planning is not very different from the way we manage a normal pension plan.
Why pension funds favour equity investments
Most people express surprise that a pension fund focuses more on equity when such investments are risky. This is because bonds do not assure bigger returns on investments. Bigger savings are possible only when you embrace risk by investing in shares (equity), real estate and infrastructure assets.
How to give an equity boost to your pension fund
You can boost an RRSP by tapping larger incomes through a Real Estate Investment Trust (REIT). An exchange traded fund (ETF) linked to infrastructure also comes highly recommended. These assets are riskier than bonds and Guaranteed Investment Certificates (GICs). But the higher income compensates the risk. Right now, the returns are more than 3% which makes a big difference to growing a retirement fund.
When aiming to increase the share of equities in the RRSP, it is better to keep it simple. Exchange traded funds (ETFs) are cheaper. Select at least three ETFs that split their assets between U.S. and Canadian multi-national companies.
As you age and contribute more money into the pension fund, keep these three ETFs as the foundation of your RRSP investment. When the pension fund has grown, add four or five blue chip equity stocks.
Selecting stocks for your RRSP
Small-cap companies have a share value between $300 million and $2 billion. These stocks are good for growing a retirement fund. Other choices are blue chip companies like banks. These shares are attractive because they have stable and rising dividend payouts. If you have doubts you can consult a good investment counsellor.
When a TFSA is a better option
If you earn less than $50,000, investing in TFSAs may be better than an RRSP for the following reasons:
- Tax refunds are smaller for RRSP investors with lower incomes
- In RRSPs, you postpone taxation to retirement when tax rates may climb higher and reduce your income.
This is where the TFSAs make a difference. TFSAs free you from taxation because your contribution is from after-tax money. TFSAs ensure that the money you receive in retirement doesn’t get reduced by taxation. Combine TFSAs with Old Age Security (OAS) pension entitlements and the Canada Pension Plan (CPP). That way, you reduce loss of income through clawback taxes.
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