Debt Reduction vs Retirement Savings

Is it more important to pay down debt or put away money for my retirement?

April 24, 2023


The simple answer is you should do both!


People who focus strictly on paying down debt are thinking only about quickly eliminating a finite dollar amount; however, they often do not realize the amount they will need to accumulate for their future retirement. This retirement pool is typically a multiple of what their debt is.


If they wait to save for retirement, they may not get there. The key to saving money for retirement is taking full advantage of the power of compounding.


For many, it can take years to save their first $100,000 but interestingly, the next $100,000 happens quicker. Not only do you have the money you’re contributing but you have the existing capital compounding. Depending on your investment strategy, it might take the same amount of time to double that amount again.


The earlier you start, the more doubling can occur. The key is to get the principal amount accumulated as soon as possible so the power of compounding can be utilized. If you wait too long, you may run out of time.


A famous quote by Albert Einstein stated that “Compound interest is the most powerful Force in the Universe”.


In my work with clients, I have seen people who paid off large mortgages and then started to really focus on their retirement saving only to realize that given the time left they were going to have to contribute a much larger percentage of their income towards their investments which forced them to make some very hard choices about their current and future lifestyle expectations.


The key lesson here is to ensure that when taking on debt, a part of your budget should include consistent savings towards a retirement goal. A little bit per month goes a long way when it’s done over a long period of time. After people pay off their mortgage, many don’t realize that even if their house value has increased over the years, if they haven’t saved for retirement, they ultimately may have to downsize both their house and their lifestyle to free up money for retirement.


I recommend separating your house from your investment portfolio, so you never have to think about relocating or downsizing your lifestyle.

RRSPs, RRIFs and Pensions

If you already have a good company pension, and do not need to supplement it with the RRSP, should you still convert the RRSP to RRIF or should you just start cashing the RRSP out?

April 17, 2023


Great question and it really depends on your situation.  For many of my clients in the same situation I have worked on many of the trade offs you propose.  However, I have found that depending on when you begin drawing your pension(s) and what type of pension you have, you may be surprised to hear that what seemed like an adequate cashflow initially may fall short years down the line.  Having that extra money in the RRSP may turn out to be more important later, or provide extras not originally anticipated. 


Assuming the above is not the case, and it will be surplus income, we need to understand what your current and future tax rates are.  If it is higher now versus later, you may want to hold on and take it later, or you may defer CPP and OAS pensions and pull the money out in chunks like you suggested now to lower your future taxable income (and possibly reduce or eliminate OAS claw backs) and get higher pensions later. 


Putting tax aside, if there are things you could use the money for now, and you are sure you will not need that tax sheltered growth of capital later in the future, it might make sense to withdraw some of this money.


Finally, there are situations (such as lowering future OAS claw backs) where moving out some of the money from your RRSP if you have room in your TFSA can make sense; with the added benefit of being able to designate a beneficiary allowing for the transfer of assets outside of probate.


When assisting clients with all these scenarios, we usually build comprehensive Wealth Plans that can take into consideration compounding, inflation and tax that make these decisions easier. 


In general, though, I typically recommend its better to have a surplus then a deficit, so I likely would tell you to leave it in the RRSP.

Diversification Without a Plunger

Our investments consist of a couple of income properties but we’re thinking about expanding our portfolio and investing in other assets like equities. Where do we start?

April 10, 2023


Great idea, diversifying your investments is often a wise move.  I think you approach an equity portfolio (that may include fixed income) as you might a new investment property.  You need to be clear on what your objectives are for this money, how much money will you commit, what is your time horizon, how much involvement you wish to have and how much near-term liquidity you will require.


Armed with those answers you can begin to assemble a portfolio.  As an example, say you have a 15-year time horizon and you want to grow a portfolio for the purposes of deriving tax efficient cashflow for a future retirement, with minimal short or medium-term liquidity, you may want to build out a diversified portfolio of blue-chip stocks with growing dividends.


Depending on how much you invest initially, you may utilize Mutual Funds, ETFs or individual Stocks.  If your plan is to add money monthly, you will be able to take advantage of Dollar cost averaging (where you wish for volatility) and may want to consider more growth-oriented holdings that tend to swing more in price.


Many investors that have income properties are asking the same question as you.  In fact, many are surprised to hear how they can build an investment pool that can generate yields north of 5% in tax efficient cash flows (Canadian Dividends) that typically grow over time with good long term capital growth as well.  Given the elevated prices in real estate and higher interest rates, it makes a lot of sense to look at equities, not to mention the pull back that has occurred in many stock prices as of late. 


Other key benefits are that you do not have to chase down rent cheques, worry about fixing toilets or being able to raise rents with inflation.

Account Rebalancing

With the current volatility in the market, is now the time to rebalance my portfolio?

April 3, 2023


To start, if you have a well-designed portfolio strategy that is integrated with a long-term financial plan than the answer is simple, rebalance regularly. This approach not only can help manage overall risk, but also help take advantage of great opportunities.


‘Regularly’ can have a few meanings; for example, you could have an annual rebalance date, look at the portfolio when you are adding new money, rolling over fixed income maturities, making an alteration to an existing holding or when there are significant moves in the market. I am not saying that you need to make significant changes during high volatility times; but those times usually present great opportunities to those who can take advantage of them. When there are significant market moves (especially the downward ones) you are either making a mistake or benefitting from someone else’s. Why does having a well-designed portfolio and rebalancing make sense? It allows one to make unemotional adjustments to their investments that are often the exact opposite of the decision they would normally make.


Currently a lot of people putting new money to work in their RRSPs or TFSAs are wondering whether they should just buy a GIC versus adding it to this ‘crazy’ market. Of course, you should add to the asset class that is determined by your strategy, which could mean a combination or in the case where your Equities have declined, to them. This is called buying low. Alternatively, when the market is on fire and doing well, most people want to naturally add to the part of their portfolio that is performing well and not to some low yielding GICs or Bonds (think two years ago); however, they are missing the chance to sell at highs and taking on a higher degree of portfolio risk.


By having a disciplined rebalancing strategy, you are more apt to invest according to the tradition of ‘buying low and selling high’. So, if any doubt, relook at your portfolio and if it or certain components are well off their designated weightings, go ahead and rebalance.

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