The top five tips for investing for retirement

As you think about that sandy beach that awaits you in retirement, consider this: the investment decisions you make now could mean the difference between hitting that beach at 55 instead of 75. Here are five tips for getting you there.

Reduce risk

The ultimate goal for your portfolio is to achieve as much return as possible while taking the smallest amount of risk. Portfolios can be subject to market risk, political risk and credit risk, to name a few. By choosing the right combination of investments and the right combination of managers you should be able to control these risks.

Make sure you hold a combination of different asset classes such as cash, fixed income and equities in your investment portfolio. Also, to ensure that you don’t have all of your eggs in one basket, pick managers who use different investment styles. When making their purchases, they will take into account the political risk and credit risk associated with the holding, among others. And although Canada’s stock market has performed well in the past, make sure to also invest in countries outside of Canada.

Take advantage of matching programs and government grants

Many individuals work for companies that will match your contributions to savings plans such as RRSP’s or Defined Contribution Pension Plans. Don’t miss out on a chance for free money. Contribute the maximum allowable for the full match and don’t look back.

The Canadian government also has registered plans that include grants to the beneficiaries. For example, there is a 20% grant paid on RESP contributions of up to $2,500 per child. Also, if you are in a lower tax bracket you could receive an extra 10% or 20% on the first $500, depending on your net family income. That’s money that you don’t have to spend on your children’s education. Instead, you can add these funds to your retirement portfolio.

Reduce Taxes

Set up your portfolio so that it is as tax efficient as possible. Maximize your RRSP and Tax Free Savings Account contributions.

In most cases, you should hold interest bearing investments in registered accounts and investments that will generate capital gains and dividends in non registered accounts. However, it can make sense to hold investments generating capital gains in Tax Free Savings Accounts if you expect to realize a large gain in the future.

If you are purchasing mutual funds in non-registered accounts, choose funds that pay out more capital gains and dividends in distributions than interest. They will be taxed at lower rates than interest income.

If you don’t have enough cash and you need to transfer an investment into a registered plan such as an RRSP or TFSA, check if there is a gain or loss on the investment first. If there is a loss on the investment, sell it and then transfer the proceeds into the plan. If you transfer the investment in kind you will not be able to use the loss against other capital gains on your tax return.

Buy Low and Sell High

Don’t let emotions dictate when you should buy or sell investments in your portfolio. When an asset class has increased or decreased by 5% or more compared to your target asset mix, sell the asset that has increased and buy the asset that has decreased. You might think that you should continue to ride the wave, but by resisting this temptation you will have locked in your gain and will now be in a position to watch the new asset class increase in value from its low.

Get the most bang for your buck

Pay close attention to your portfolio fees as they can erode the value over time. Mutual funds have management expense ratios. Brokers may charge a commission for every trade. You may also have purchased mutual funds that have a deferred sales charge. These could potentially cost you a lot if you need to redeem the fund earlier than expected.

By using Index Funds and ETF’s in your portfolio you can reduce your fees significantly. You can also reduce your fees if you do everything yourself using a discount brokerage account. However, not everyone can or wants to manage their portfolio themselves. If you are one of these people, you should do your research to find the person who will charge you the lowest fee for the best customer service. A balanced mutual fund typically has a management expense ratio of about 2.2%, whereas you can invest your money with a fee-for-service wealth manager who will charge a lot less and will also provide you with much more service.

Marcy Ages is a passionate, detail-driven provider of financial planning services, including investment management and tax preparation. As founder of The Care Network, Marcy also works with other service professionals to support her high-net-worth clients with their estate planning and assisted living issues.

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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