Portfolio rebalancing: How to manage your investments for long-term success

The past year was a standout for financial markets. Stock markets surged, retail trading boomed, and optimism seemed to drive investment decisions.

Whether you’re a new or experienced DIY investor, it’s easy to get swept up in the excitement of a bull market run and lose sight of your long-term investing strategy. Achieving your financial goals requires understanding yourself as an investor, knowing your risk tolerance, and ensuring your portfolio remains balanced and aligned with your time horizon.

Knowing how a balanced portfolio works, why portfolios drift and how to rebalance effectively is essential to meeting your financial goals.

 

What is portfolio rebalancing?

A balanced portfolio involves allocating investments across various asset classes, such as stocks, bonds, and cash, in ratios that align with your risk tolerance, time horizon, and investment strategy. For example, a younger investor may prioritize like stocks for growth potential, while older investors often favour fixed-income investments like bonds to reduce risk and preserve the earnings accumulated from investing.

Over time, market fluctuations, sector performance, global events, and trends can cause this mix —known as asset allocation — to drift away from the target asset mix and risk level that you started with. This phenomenon is called portfolio drift.

Portfolio rebalancing addresses this drift by restoring your original asset allocation. This involves buying or selling assets to bring your investment portfolio back to its target balance. Think of rebalancing as a routine check-up for your investments — similar to steering a car back on course after a slight deviation. By reviewing and adjusting your investments periodically, you ensure your portfolio stays on track with your risk tolerance and goals as you continue on your investing journey.

 

Why does portfolio drift occur?

Several factors contribute to portfolio drift:

  • Market performance: As of 2024, the TSX has grown by 21.54 per cent. For Canadians with TSX-focused investment funds or stocks in their portfolios, this surge might mean the overall value of stocks in their holdings has risen significantly, while may have declined.
    A portfolio favouring these TSX stocks could yield higher returns but exposes you to greater market volatility. Remember, this deviation from your original asset mix and risk level could leave you vulnerable to a bear market or a sudden drop in stock prices.
  • Seasonal trends: Short-term events can also change your portfolio’s balance. The Santa Claus Rally, where stock prices often rise during the final week of December or the January Effect, where stocks, especially small-cap equities tend to perform well at the start of the year, could also impact your asset allocation.
  • Political and economic events: Major political or economic changes can have a big impact. For example, the outcome of 2024 US election has caused the US stock markets to surge and interest in alternative investments like crypto to increase significantly. While these changes may offer growth opportunities, they also introduce risks tied to global trade, increased speculative trading, regulatory changes, and market uncertainty.

 

Why should you rebalance your investment portfolio?

By routinely rebalancing, you ensure your portfolio is well-diversified, a cornerstone of sound investing. For those implementing a specific investment strategy, rebalancing can help maintain your strategy.

Monitoring your portfolio also becomes especially important during significant market swings. According to Vanguard’s 2020 study titled “The Value of Advice: Assessing the Role of Emotions,” investors with clear financial goals were more likely to stick to their strategies during turbulent times. The research showed that following a plan reinforced long-term thinking and helped investors avoid chasing short-term gains out of FOMO (fear of missing out).

 

How and when should you rebalance your portfolio?

Timing when to rebalance is just as important as the process itself. Studies show that a planned approach to monitoring investments reduces the risk of overconcentration in a single asset or sector. Here are three common approaches:

  • Calendar rebalancing
    This approach involves reviewing your portfolio allocation at regular intervals such as quarterly, semi-annually, or annually. However, one critical aspect to remember is that rebalancing too frequently or infrequently can be inefficient. Rebalancing too often may result in higher transaction costs and larger tax implications, especially in taxable investment accounts. On the other hand, rebalancing too infrequently can cause your portfolio to drift too far from the target allocation over time.
  • Threshold-based rebalancing
    This method, which is sometimes used by asset managers, allows your portfolio allocations to drift within a tolerance threshold. Rebalancing only occurs when the value in your portfolio exceeds this range. For example, if your target allocation within your portfolio for equities is 60 per cent, the threshold-based approach would require rebalancing if the equity allocation exceeds 65 per cent or falls below 55 per cent.
    One drawback of this method is that threshold rebalancing requires frequent monitoring, which may not be practical for some DIY investors.
  • Hybrid rebalancing
    Hybrid combines the calendar-based and threshold-based approaches. Asset allocation weights are checked at regular calendar intervals, but changes are made only if your investments have drifted beyond your target percentages by a certain amount.

 

Successful investing isn’t about perfect timing or chasing market trends. It is about making informed, disciplined decisions that align with your unique financial journey. Your portfolio is more than just numbers — it’s a reflection of your goals and long-term vision. By staying proactive and periodically rebalancing, you can keep your investments on track for long-term success.

 

 

The gift of investment literacy: Inspire meaningful investment habits this holiday season

Why not give a gift that goes beyond the ordinary this holiday season? As we gather to celebrate the season, inspire your loved ones with tools and resources that can help them build a strong financial future. According to a CIBC’s Financial Literacy and Preparedness Report, 60 per cent of Canadians expressed a desire to boost their financial knowledge. During the holidays, it’s the perfect time to spark conversations and empower those around you to take meaningful steps toward lasting financial independence.

Here are a few ways to encourage your loved ones to take charge of their financial future:

1. Introduce loved ones to the basics of investing

Investing can seem intimidating, especially for beginners. Start by discussing their dreams and plans for the coming year. Whether it’s saving to buy a home, pursuing personal passions, or maybe even planning for retirement, these conversations can lead to investing for the future.

Part of that discussion could be the importance of risk tolerance. Encourage them to assess their comfort with market ups and downs by learning through the ASC’s various resources and tools, including a CheckFirst risk tolerance quiz. This quiz provides insights that can help someone select investments that align with their personal financial preferences and goals.

Help friends and family see the value in tools like goal-tracking apps or financial planners to help keep them on track. These can help them stay accountable, monitor progress, and adjust plans as needed, making the journey toward achieving their goals both manageable and motivating.

2. Give the gift of compound interest

Explain the concept of compound interest, which allows investments to grow exponentially over time. Interest is calculated on the initial principal and the previously accumulated interest. Showing examples of how small contributions today can lead to significant growth in the future can make investing feel achievable and exciting.

Introduce them to CheckFirst’s compound interest calculator, an excellent tool for everyone to understand where they are and what they need to do to build a financially successful future. The website also offers free tools, articles, and in-person and virtual programming to build and strengthen investment literacy throughout the year.

3. Start a conversation about future goals

With the new year just around the corner, the holiday season is also a great opportunity to reflect on the past year and plan for the future. Talk with your loved ones about their specific financial goals. Identifying whether their goals are short-term or long-term is an essential step, as this determines the type of investment accounts, funds, and strategies they’ll need.

For short-term objectives, like saving for a house, options such as a First Home Savings Account (FHSA) or an RRSP Home Buyers’ Plan are designed to help achieve this efficiently.

On the other hand, long-term goals like retirement savings may benefit from accounts such as a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP). Here, investments with the potential for higher returns, such as exchange-traded funds (ETFs), mutual funds, or stocks, could offer more growth over time.

Investing in the financial literacy of your loved ones can help them take control of their finances and start achieving their dreams. But, if you’re unsure about providing advice, you can also consider gifting a small contribution to a registered investment account like a TFSA or RESP. It’s a thoughtful and practical way to help loved ones take their first step toward their financial goals.

Feeling stressed about money? Here are 3 tips to overcome financial anxiety when investing

Over the last few years, inflation and the rising cost of living, stagnant wages and seemingly unattainable housing prices have created a perfect storm of financial stress worldwide, including for many Canadians. These pressures have sparked a growing wave of financial anxiety for many. This has led many to question whether traditional financial advice still applies or if planning for the future is even worthwhile.

But despite these challenges, it’s crucial to remember that thoughtful steps and an understanding of how markets work can help you build a more positive outlook toward your finances. This Financial Literacy Month, consider the theme “Money on Your Mind: Talk About It!”, and use this month to rethink your relationship with money. Instead of feeling financially nihilistic or overwhelmed, enhance your financial literacy and set clear, achievable goals that will empower you to make confident choices that support your future.

Learn how market cycles work

One of the most important basics to understand is how markets behave over time. The saying “what goes up must come down” has a parallel in economics — all markets go through boom-and-bust cycles. In a free market economy, like ours, the cycles are integral to the system. The downturns or the dips in the market are natural and should be expected throughout your investing journey. Downturns allow the market to self-correct, adjusting the values of companies and sectors based on financial performance, economic conditions like interest rates and future growth potential. Although these dips can be unsettling, history shows that downturns are temporary, typically lasting between 12 to 48 months. Ultimately, the free market rewards innovation, patience and strong business fundamentals, eventually leading to new periods of growth.

When thinking of an economic dip, many might recall the dot-com bubble of the 1990s, which wiped out $5 trillion in Nasdaq value, or the 2008 financial crisis, the most severe downturn since the Great Depression. Yet, these weren’t permanent slumps. The post-downturn markets didn’t just recover. The rebound was significant; within a decade of the 2008 crisis, the S&P 500 returned approximately 450 per cent, including dividends. Recognizing this market resilience can help you stay steady through challenging times and mitigate the urge to rush into emotional, short-term decisions.

Categorize your financial goals

In times of financial stress, goals — whether taking a gap year, going on vacation, or buying a home — can feel unattainable. For many, this sense of hopelessness fuels a “nothing to lose” mentality, which can lead people to take on excessive risk or choose investments that don’t align with their actual financial goals. The rise of meme stocks is a recent example of this trend. In 2021, the CEO of the UK’s Financial Conduct Authority (FCA) observed that younger investors increasingly viewed investments as entertainment that drove them to invest in speculative assets with little or no underlying company fundamentals.

To regain control over your finances and create a sense of progress, organizing your financial goals into categories — such as short-term, medium-term, and long-term — can make them feel more achievable. This approach can also help you match each goal with the right investment option, giving you a clear roadmap and reducing the impulse to make emotional choices.

An effective strategy could be to break down long-term goals into smaller, more achievable milestones. With this approach each milestone builds on the last, creating momentum and a structured path toward your larger objectives.

Evaluate your financial information sources

The digital age has transformed how we consume financial information. A Canadian Securities Administrators Investor Index survey found that 53 per cent of Canadians use social media for investment information. Among investors aged 18-24, this number jumps to 82 per cent, with YouTube, Instagram, and TikTok leading the way.

While social media has made access to financial information easier, these platforms are programmed to prioritize content over sound financial analysis. Algorithms are programmed to act as echo chambers, amplifying users’ beliefs by presenting similar content repeatedly. This can lead to biased views or could further feed into existing financial anxieties.

Take time to critically evaluate the credibility and qualifications of the individual offering you financial advice. Focusing on reliable, unbiased information will help you build a more balanced and nuanced outlook on your financial future. Remember, social media often portrays an idealised version of real life, which can create an unhealthy sense of FOMO (Fear of Missing Out).

Financial Literacy Month is the perfect opportunity to develop a healthy relationship with your money. Starting with the basics and understanding the fundamentals can empower you to shift from financial nihilism to a more confident mindset—understanding that while you may not control the market, you can control your approach to it.

International diversification: Does it belong in your investment portfolio?

Diversification is a cornerstone of a sound investment strategy. At its simplest, the concept is often likened to the adage “Don’t put all your eggs in one basket”. Investing in different types of assets (like stock, bonds, real estate, different industries, and geographic regions helps to reduce the overall risk of an investment portfolio. Most Canadian investors use investment funds to diversify their portfolios and mitigate investment risks. However, a June 2024 study by Vanguard highlighted a common bias among Canadian investors: a preference for domestic stocks, known as home bias.

Investing in a market that feels familiar is not a trend unique to Canada. Home bias is a global phenomenon. But the overreliance on investments from a single country can be limiting. Home bias can expose a portfolio to assets that are dependent on common factors — including the political, economical, and technological stability of the country. This is where diversifying internationally can be beneficial.

October is Investor Education Month, the perfect time to reassess your strategies and deepen your understanding of fundamental investment concepts like diversification. Before investing beyond Canada, ensure you learn and understand all your options and consider how diversification can benefit your investment portfolio.

 

Canadian market vs. the global market

The Canadian market is known for its stability, resilience, and strong regulatory oversight. However, investing exclusively in Canada can come with limitations. The Canadian stock market is relatively small. According to a 2023 global equity market study by the Securities Industry and Financial Markets Association (SIFMA), Canada accounted for only 2.7 per cent of world capital markets. This means that over 97 per cent of the world’s investment opportunities are located outside Canadian borders. Investing in international markets can provide Canadian investors with an opportunity to benefit from the size and scale of the global economy.

 

Canada’s market concentration

Canada is the ninth-largest economy in the world, with key industries like manufacturing of products such as paper, technology and automobiles and natural resources including mining, oil and gas and agriculture playing a critical role in the country’s economy. This industrial focus is strongly reflected in Canada’s capital market. As of August 2024, almost half of the S&P TSX Composite Index — which includes the largest companies listed on Canada’s primary stock exchange — is mainly comprised of two sectors: financial institutions, such as banks, and energy, including oil and gas resources. Similarly, the Canadian Securities Exchange Composite Index is dominated by life sciences, followed by mining.

Due to this concentration in Canadian public equity markets, investors who invest solely in their home country may miss out on opportunities in sectors that are growing more significantly in other countries. By diversifying internationally, Canadian investors can gain exposure to other sectors that are driving global economic growth and innovation.

 

The rise of emerging markets

Many Canadian companies have a strong tradition of paying consistent dividends, which may appeal to investors seeking a steady income. However, the capital markets in some developing nations, commonly referred to as emerging markets, often offer attractive opportunities due to their rapid economic growth and potential for higher returns. In fact, a Goldman Sachs report suggests that these emerging markets are projected to overtake the U.S. by 2030. In a June 2024 paper, Franklin Templeton highlighted that emerging economies have become more resilient and less vulnerable to fluctuations. It is important to remember that emerging markets do carry increased investment risks — including political instability, regulatory uncertainty, lack of liquidity and currency volatility. Before investing in these markets, consider talking to a registered financial advisor who understands your risk tolerance, your investment goals and time horizon.

 

Tactics to diversify your investment portfolio

  1. Explore global or international market funds: Globally or internationally focused investment funds, including ETFs, can provide access to a wide range of global securities. This enables you to easily diversify your investment portfolio across the global economy.
  2. Consider a long-term perspective: A long-term approach aligns with the fundamental principle of diversification as different markets tend to outperform others at different times. By maintaining a diversified portfolio, an investor can potentially benefit from growth opportunities across various regions and economic cycles.
  3. Rebalance your portfolio regularly: As market conditions change, it’s important to rebalance your portfolio to ensure that your asset allocation aligns with your risk profile and investment goals.

 

Diversification is a powerful tool for managing risk and potentially enhancing returns. While investing in Canada offers home-country advantages, such as familiarity with local companies and favourable tax treatment, investing across diverse geographies can help build a more resilient portfolio that is better equipped to weather market fluctuations. By taking a long-term view and exploring opportunities in different geographic regions, investors can embrace a holistic approach to diversification and potentially reap its rewards.

How to determine if an investment fund is right for you

For many Canadian investors, investment funds are commonly used to build a diversified portfolio. Diversification in investing means the act of spreading your investment risk across multiple companies and investment types. Investment funds like mutual funds and exchange-traded funds enable investors to pool their money together to invest in a basket of investments like stocks and bonds rather than having to buy each investment directly. To help investors learn more about a publicly available fund, fund issuers are required to provide a prospectus and a fund fact sheet on their websites, which are documents that outline important information about the fund and its managers.

While investment funds are a great way to gain exposure to a range of investments and can help mitigate investment risk, investors need to take the time to properly understand the information contained within the prospectus before buying in. Here are a few things to consider when determining if a fund is right for you.

1. The fund’s objective

A fund’s objective is a high-level overview of what it aims to achieve for its investors. Every publically available fund will include its objective within its prospectus. For example, a fund’s objective could be to track the performance of a particular market segment, provide long-term capital growth or generate regular monthly dividend income, which is profits from the businesses held in the fund, paid to investors for holding shares or units. Investors should ensure that the fund’s objective aligns with their goals and when they will need to withdraw their money before adding it to their portfolio.

2. The fund’s strategy and asset allocation

Reviewing the fund’s policy or strategy is a way to examine how the fund aims to achieve its objectives. Investors can better understand the fund’s strategy by examining the types of sectors, countries, and investments the fund will invest in and the percentage of the fund allocated to each.

Reviewing asset allocation also helps investors avoid inadvertently over-investing in a particular company, country, or sector, which could skew their risk level and overall asset allocation mix for their entire portfolio.

3. The fund’s risk rating and performance

The level of risk that an investor is willing to embrace is a critical component of any investment. Higher levels of risk can potentially provide a more significant return, but it can also increase the chances of losing money.

While past performance is not a guarantee of future performance, investors can also review year-over-year returns and average returns over time to see if the risk and return align with their financial goals.

Finally, if the fund tracks a benchmark index (a list of companies or investments within a market segment), investors should assess how well it compares to its benchmark. Essentially, the closer it matches its benchmark, the more accurate the fund is in providing equivalent returns after fees.

4. The fund’s trading information and fees

Last but not least, investors should take the time to review the trading information for the fund. In this section of the prospectus, investors can confirm important details, including who runs the fund, what exchange the fund is listed on, the currency the fund can be purchased in and the management fees associated with holding shares or units of the fund. It’s essential to recognize that fees can significantly impact the overall returns of your investment. Seeking out funds with lower management fees that align with your goals can help reduce your investment management costs, which can compound over time as your investment grows.

Investment funds can be an essential asset in your portfolio. By reviewing the prospectus information thoroughly, investors can better ensure that they choose funds that align with their risk tolerance, time horizon, and fee expectations.

3 common misconceptions about investing and how to overcome them

For many Canadians, investing can seem intimidating or out of reach. Misconceptions, often fueled by jargon, fear or misunderstanding can lead them to either avoid investing entirely, make risky decisions or worse, fall victim to investment scams.

While investing is a continuous financial journey, understanding the basics and starting with strong fundamentals can set you up for success. Here is a look at some common misconceptions about investing and how you can reframe your thinking:

 

Misconception #1: Investing is like gambling

Pop culture often portrays investing as a fast-paced, high-risk thrill ride. This narrative fuels the long-held belief that successful investing solely involves day trading and playing the market odds for quick profits. For some, this portrayal may seem similar to gambling and can scare them away from investing or lead them to invest in high-risk and unsuitable opportunities.

Though all investments carry some degree of risk, planning an investment strategy with long-term goals vastly differs from gambling for three main reasons:

  • Time horizon vs right now: Gambling focuses on immediate results while investing takes a long-term view of growing money over extended periods of time through compounding interest. Emotions and adrenaline shouldn’t dictate investment decisions. With a financial plan in place, investors can approach investing in a mindful and strategic way.
  • Informed choice vs chance: Long-term investing considers crucial financial information about the stock, company or fund. You can study a company’s earnings reports, products and services, and leadership before committing to investing your money. In contrast, gambling is simply betting your money on the odds and a healthy dose of luck.
  • Ownership vs all-or-nothing: When you invest money into buying a stock, mutual fund, or ETF, your purchase gives you partial ownership of a company. The return on your investment is never an all-or-nothing scenario like in gambling. Investments can deliver returns in the form of interest, dividends, or capital gains. Diversifying your assets to include low-risk options like GICs, bonds, or a basket of investments through a mutual fund or ETF can further help manage risk

 

Misconception #2: Investing is only for the rich

This is by far the most common barrier to investing. According to CIRO’s 2024 Investor Survey,  six-in-10 non-investors identified not having enough money to invest as one of the things holding them back from investing. For many Albertans, finding room in your budget for investing may seem like a privilege. But modern-day investing has come a long way and is much more affordable.

Gone are the days of expensive stockbrokers and minimum investment requirements. Thanks to advancements like robo-advisors, low cost brokerages, fractional shares and ETFs, you could start investing with as little as $1. Today, the ability to start investing has minimal financial barriers.

An interesting statistic from Ramsey’s 2024 National Study of Millionaires showed that most U.S. millionaires did not inherit any money from their parents or family members. According to the survey, eight out of 10 millionaires came from middle-income or lower-income families. In the same study, three out of four millionaires stated regular consistent contributions lead to success.

Even small investments are worthwhile! Investing can start with small amounts based on your budget and increase as you earn more or are able to allocate more towards your long-term goals.

 

Misconception #3: It’s too late to invest

The goal of any investor is to maximize profits and earn the best return on their investment, while staying within their risk tolerance and time horizon. A longer time horizon allows your money to compound and grow over time faster. But, this thinking can lead some to believe they’re too late to invest or need to take on excessive risk to catch up.

This isn’t the case. Three key lessons that are critical to your success as an investor involves understanding:

  • A financial plan: Regardless of age, having a financial plan in place can help you consider realistic goals and accurate timelines for when you can achieve them. Certified financial planners can help you create an action plan taking into consideration your age, current financial obligations, and risk tolerance.
  • Time in the market: Time spent invested and in the market is generally better than time spent staying on the sidelines. Remember, the power of compound interest works regardless of when you start investing.
  • Risk and return: Taking on more risk doesn’t guarantee a higher return. Know your personal risk tolerance. This will help ensure you choose suitable investments aligned to the risk you are comfortable taking.

 

Like the ancient Chinese proverb, the best time to plant a tree was 20 years ago. The second best time is now.

Common misconceptions can skew how you view and approach investing. With a measured approach and a strong foundation backed by investing principals like diversification, risk vs. reward and compound interest, you can start your investing journey on the right path today.

From saving to drawdown in retirement: Understanding RRIFs

Imagine this: you have diligently saved towards retirement for decades, consistently contributing to your Registered Retirement Savings Plan (RRSP) or Group RRSP plan through your employer during your working years. Now, with retirement on the horizon, a new question arises: how do you withdraw from your hard-earned savings and create a steady income stream through your golden years? One way is through a Registered Retirement Income Fund (RRIF), the bridge between your accumulated savings and retirement.

 

What is a RRIF and how does it work?

Much like other registered accounts, the Registered Retirement Income Fund (RRIF) is a tax-deferred retirement account available to Canadians. However, the RRIF is not an account to which you can contribute. Rather, it is an extension of your RRSP.

RRSPs are designed to help you save for retirement by allowing tax-deferred growth on your savings and investments until you’re ready to withdraw them. Your accumulated savings and investments from your RRSP can be transferred to a RRIF, which automatically creates a routine annual drawdown process of your assets to provide an income stream.

Similar to the RRSP, the RRIF also offers you the option to allocate your underlying funds to a number of investments such as stocks, bonds, mutual funds, Exchange Traded Funds (ETFs), and Guaranteed Investment Certificates (GICs). You can also transfer funds into a RRIF from a Pooled Registered Pension Plan (PRPP), a Registered Pension Plan (RPP), a Specified Pension Plan (SPP), another RRIF, or from a First Home Savings Account (FHSA).

 

When to convert and what to consider when converting a RRSP to a RRIF

An RRSP can be converted into a RRIF before standard pensionable age. Once converted, no additional funds may be added to it. However, a crucial deadline exists. By the end of the year you turn 71, your RRSP must be — transferred into a RRIF, converted into an annuity, or paid out as a lump sum. Failure to convert your RRSP to a RRIF will result in your account being deregistered, leading to serious tax issues.

If you realize you have opened a RRIF too early and change your mind, it can be converted back to an RRSP as long as the account owner is 71 or younger. It is best to consult a financial advisor who can provide personalized advice based on your situation.

 

Understanding RRIF withdrawals

A hallmark feature of a RRIF is its mandatory minimum withdrawal. Unlike an RRSP, where you can grow your money untouched, the Registered Retirement Income Fund requires you to take out the minimum required amount each year.

There are some factors to consider when withdrawing from your RRIF:

  • The minimum percentage: The minimum withdrawal amount is calculated based on percentage of your RRIF’s total market value at the end of the previous year. This percentage increases as you age, reflecting the idea that you will need more income as you get older. If your spouse is younger than you, the minimum withdrawal can be based on your spouse’s age, allowing for lower minimum payments and longer tax-deferred growth.
  • Finding the right amount: Since a RRIF offers tax-sheltered growth only on the money that remains within the plan, all withdrawals, including the minimum amount, are considered income and taxed at your marginal tax rate. While the plan offers the freedom to withdraw more than the minimum if needed, it’s recommended to consider the following before doing so:
    • You could deplete your savings faster than anticipated.
    • The amount of taxable income increases as you withdraw more.
    • This can impact eligibility for certain government benefits like the Old Age Security (OAS).

 

Should you convert your RRSP early?

The decision to convert your RRSP to a RRIF is a significant milestone when planning for retirement. While some people might wait until their income is lower to convert, there’s no one-size-fits-all answer.

There can be some advantages to converting early, like accessing your savings sooner. However, there are also drawbacks. To make the best choice, consider your retirement timeline, goals, health, and spouse’s age and income. These factors will influence your future needs and tax implications.

The best choice for you will depend on your individual circumstances. Talking to a certified financial advisor can help you weigh the pros and cons and decide what’s right for your retirement goals.

 

What happens to a RRIF when the annuitant dies?

By default, upon death, the value of your RRIF becomes taxable income of your estate. To prevent this, you can name a beneficiary or a successor annuitant.

  • Beneficiary: You can choose anyone as a beneficiary. However, only a beneficiary who is 71 or younger can transfer the funds into their RRSP without affecting their contribution limit. The RRIF account is then closed, and your estate avoids income tax on the amount.
  • Successor annuitant: Only your spouse or common-law partner can be named a successor annuitant. In this case, they will take ownership of the RRIF and have the choice to continue receiving payments, transfer the assets to their own RRIF, or delay the annual withdrawal by transferring it to their RRSP if they are 71 or younger.
  • Financially dependent infirm child or grandchild: Proceeds of a deceased annuitant’s RRIF can also be rolled over to the Registered Disability Savings Plan (RDSP) of a financially dependent infirm child or grandchild.
  • Financially dependent child or grandchild: The funds can only be transferred to a term annuity if the child or grandchild is financially dependent, but not because of a mental or physical impairment.

 

Investing as you age

Having a sound financial plan can play a significant role in helping you work towards your retirement goals. While building up your savings and investments for your retirement is a worthwhile endeavour, finding the optimal path to drawing them down is just as important. Take the time to learn more about RRIFs and how they can fit into your overall retirement strategy.

Planning ahead: Preparing for retirement

Most Canadians aspire to having a happy and comfortable retirement. Achieving this goal requires proper financial planning and wise investment decisions. One of the commonly used investment vehicles to achieve this goal is a registered retirement savings plan. However, the question remains if this traditional investment method still holds merit for you.

What is an RRSP and how do they work?

An RRSP is a government-registered retirement savings plan in Canada designed for individuals to contribute funds with the specific aim of saving for their retirement.  Advantages of investing in an RRSP include:

  • tax-deductible contributions,
  • the option to make early withdrawals for a first home purchase,
  • compounded growth, and
  • the flexibility to convert an RRSP to a Registered Retirement Income Fund (RRIF) for structured periodic payments as early as age 55.

An RRSP must be opened before the age of 71, as stipulated by the Canada Revenue Agency. The annual contribution limit for RRSPs is set at 18% of the previous year’s earned income or a maximum dollar limit, whichever is lower. For 2024, the maximum contribution limit is $31,560. Exceeding this limit by more than $2000 will result in a 1% per month tax penalty on the excess contributions.

Withdrawals from your RRSP before turning 71 years of age will incur a withholding tax. The exact rate of tax depends on your province of residence. It is important to note that early withdrawals must be declared as income on your tax return and they will be taxed at your marginal tax rate. Additionally, withdrawals from an RRSP can result in permanent loss of the contribution room.

Starting RRSP contributions early in life can help you leverage the power of time and compound interest. This means that your investments have more time to grow, potentially resulting in a more substantial retirement fund. Additionally, early contributions allow you to take advantage of tax-deferred growth, which means that you can reduce your taxable income now and enjoy the benefits of tax-sheltered growth until retirement. Ultimately, starting an RRSP early can help you lay the foundation for a more secure retirement. Use the ASC’s RRSP calculator to see how contributing often and early can benefit your retirement plan.

What types of RRSP options exist for investors?

If you are considering opening an RRSP account, it’s important to know the available options to make an informed decision. Essentially, you need to decide whether you want to invest individually or in collaboration with others.

  1. Individual RRSP: An individual RRSP is registered in your name, providing exclusive ownership of the investments and associated tax benefits. This option is ideal for those seeking full control and ownership over their RRSP portfolio. Consider choosing a self-directed RRSP if you prefer to make investment decisions on your own. With a self directed RRSP, you have the flexibility to purchase and sell various qualified investments such as GICs, bonds, mutual funds, and more. However, keep in mind that commissions on transactions apply, similar to a non-registered brokerage account. Additionally, an annual administration fee may be applicable. Learn more about the different types of investments available to you.
  2. Group RRSP: A Group RRSP is a retirement savings plan that your employer offers. It may come with some enticing benefits, such as matching contributions. Matching is when your employer contributes to your RRSP as well, providing essentially free money for your retirement savings. Additionally, you may also enjoy lower management fees on the investments held within the Group RRSP, and the convenience of automatic contributions directly from your paycheque.
  3. Spousal RRSP: A spousal RRSP is an account designed to benefit couples by allowing income splitting during retirement. Contributions made by the higher-earning spouse generates tax deductions, while withdrawals are attributed to the lower-earning spouse, potentially reducing overall tax liabilities.

Each option caters to specific needs and preferences, providing flexibility in aligning your RRSP with your unique financial goals. Consulting with a financial advisor can further guide you in making an informed choice tailored to your circumstances.

Additionally, it’s worth exploring other tax-advantaged accounts like Tax-Free Savings Accounts (TFSA). TFSAs prove advantageous, particularly for those with income taxed at lower rates or those who are anticipating increased income in the future.

Four steps to building financial resiliency into your investing journey

For many new and experienced investors, it can be challenging to invest and work to achieve financial goals while managing the rising costs of daily life. However, developing certain behaviours and processes in relation to your money can help you stay on track as well as build your financial resiliency. These steps hopefully mitigate stress and help you weather the storm of rising costs.

November is Financial Literacy Month, a time when Canadians are reminded to strengthen their financial knowledge and resilience. The following four steps can help you become more financially resilient.

  1. Practice financial self-awareness
    When times are tough, ignoring your financial situation and maintaining your current spending habits can be comforting. However, this feeling of comfort may be short-lived though, as uncertainty can become a source of anxiety. Instead, practice financial self-awareness by staying mindful and fully engaged with your finances. By assessing your income, expenses, savings, investments and debts, you can better understand where you can cost-cut, which debts to pay off sooner, and how to rebalance your spending towards necessities and long-term goals.
  2. Recognize what you can and can’t control
    It is critical that you recognize that certain factors – such as interest rates or a possible economic recession – are beyond your control. However, building a plan that factors in worst-case scenarios can help make you feel empowered when times are unpredictable. For instance, if you’re worried about the market heading for a recession, consider the time horizon of your investment goals and if you are well-diversified to reduce the risk you are taking on. If you need more assistance with your financial planning or reviewing your investment portfolio, a certified financial planner or registered investment advisor can help you better plan for the future.
  3. Create and maintain an emergency fund
    An emergency fund is a savings account dedicated to helping you cover life’s unforeseen costs without having to draw from high-interest debt options such as credit cards or selling your investments early. One of the best ways to establish an emergency fund is to start small, setting aside a small portion of every paycheck into a savings or high-interest savings account. Over time you can automate them through your bank or credit union, or even increase your contributions as your budget allows. Creating an emergency fund equivalent to three to six months of your typical expenses can provide you with peace of mind that you can sufficiently cover most emergency costs.
  4. Prioritize paying down consumer debt
    Consumer debt, such as credit cards and the negative compound interest they generate, can limit the money you have available for day-to-day life as well as your ability to save and invest. Only paying the required minimum on your credit card will help you avoid additional late fees, but will only pay off a fraction of the principal loan. Worse, ignoring your debt can compound the interest. For example, if you did not make any payments on a credit card with an interest rate of 24.99 per cent (the annual percentage calculated daily and charged on any balances carried from month to month), the amount you owed would double after just four years. Paying down your debt frees up your future earnings so you can use them elsewhere.

Building financial resilience takes time and conscious effort, but developing healthy habits now can pay off for years to come. This November, take small steps – track your spending, start an emergency fund and/or make a plan to pay down debt.

Three tips to becoming a better investor this fall

October marks Investor Education Month, a time when Canadians are reminded to strengthen their investment literacy. Whether you are a new or experienced investor, refreshing yourself with our top tips and the fundamentals of wise investing can help you avoid poor performance, common mistakes and fraud.

  1. Consider where you are getting your investing advice
    Investors today are inundated with news, speculation and excitement across traditional, social and digital channels on what to invest in or how to invest. Before putting your money into any recommended investment or changing your current investing approach, consider the qualifications and knowledge of those providing the recommendations. One of the greatest things you can do as an investor is to stay focused on your investing plan. Use diligent research into the fundamentals of the company you are planning to invest in, including its profitability, debt obligations and return on equity. Understanding the fundamentals and relying on information from qualified experts using publicly available data can help you make a more informed decision and avoid fraud.
  2. Pay yourself first
    Investing consistently over time, regardless of whether the share price of an investment is up or down, is one of the best ways to reduce your average cost per share over time. Avoid the costly mistake of trying to time the market or not investing at all. Automating your contributions to your investment accounts is an easy way to remove the decision of when to invest and turn investing into an ongoing and sustainable habit. Some trading platforms may even allow you to set rules for automatically purchasing investments once your contributions reach your accounts.
  3. Reinvest your dividends
    Some single stocks and investment funds offer dividends to their shareholders. Dividends are a share of a company’s profits paid to shareholders either monthly, quarterly or annually based on the number of shares they hold. Investors wanting to maximize the compounding effect of their investments can apply for a dividend reinvestment plan (DRIP) with the financial institution, firm or trading platform they use, for any dividend-producing investments in their portfolio. With a DRIP in place, any dividends received from an investment equal to or greater than the investment’s share price will automatically purchase more shares for you at no extra cost. This reduces the cost of placing trades and further compounds your investment earnings over time.

Improving your investment knowledge on an ongoing basis can play a significant part in helping you reach your financial goals and avoid fraudulent investment scams. Check our Fraudster’s playbook to learn more about avoiding fraudulent investment scams.