# RRSP's, The Good, The Bad and the Ugly?



## Lawrence (Mar 11, 2003)

I finally have a fairly secure job and I'm thinking about retirement,
I asked at ScotiaBank today about RRSP's and the teller setup an appointment for me.

Anything I should look for or do?

I've got about 17 years left before I retire, Kicking myself for not doing this earlier.

D


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## iMatt (Dec 3, 2004)

dolawren said:


> I finally have a fairly secure job and I'm thinking about retirement,
> I asked at ScotiaBank today about RRSP's and the teller setup an appointment for me.
> 
> Anything I should look for or do?
> ...


Huge topic, so I'll just kick in a couple of quick points.

1 - Know your risk tolerance levels. Chances are, starting late means you have a contradiction to resolve: you want to make lots of money fast, but you're an inexperienced investor and might freak out when you see your account shrink if the market takes a dip (never mind a major correction). Your appointment will surely include an "investor profile" interview that will tell you you're a "_____-type investor" with a certain risk tolerance level. That's good, but you should go in with some kind of idea beforehand.

2 - Research the risks and rewards of different kinds of investment before you go for your appointment. One key thing you may find: if the idea of mutual funds appeals to you, you may have a problem in that your bank can only sell you its own "brand", and these may not be the best available. In this case, you will have to think about going with another institution in the long run.

3 - Most people should probably avoid the "Scotia Partners Portfolio" ("fund of funds") mutual fund product they'll almost certainly push on you. These kinds of things are generally high cost, relatively low reward, and great for the bank. I guess it could be OK when you're starting out and until you know a bit more about funds -- assuming you want to put your savings in mutual funds at all. (They will probably assume you want that, so learn about them first and don't let them push you too hard if you just aren't interested.)

3b - You are there for a sales appointment with a salesperson. They are going to try to sell you products that not only provide value for you, but for them. Know the cost of things before going in. And shop around. 

4 - No matter how you decide to invest your savings, the key to getting to your goal is to set aside a certain amount every week, and stick to it (or increase it when you can). Scrambling to come up with RRSP contributions every spring is a drag. Borrow to contribute as a last resort and if there are good reasons (e.g. you had a sudden spike in your income and want to shelter as much of it as possible).

5 - Generally, when starting a portfolio most people will recommend starting out with relatively high risk levels (higher potential rewards), slowly reducing risk levels over time as you approach your goal. I think that's good advice for most people, but again -- you just might not want to entertain the possibility of your savings shrinking even for short periods.


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## Lawrence (Mar 11, 2003)

Thanks, Great advice...Now how do I invest in Apple...heh.

D


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## iMatt (Dec 3, 2004)

dolawren said:


> Thanks, Great advice...Now how do I invest in Apple...heh.
> 
> D


That's probably exactly what you should not do.  But if you want to invest in individual stocks, you will have to open a brokerage account. Wouldn't recommend it for a beginning investor, though. Far too easy to get burned if you don't know what you're doing.


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## CanadaRAM (Jul 24, 2005)

OK, you know the basic principle of RRSP - that it is a tax deferral, rather than a tax deduction plan. You get to deduct the tax for your contribution today, and you pay income tax on it when you withdraw it in 17 - 18 - 19 years when you need it. You are gambling that:

Gamble #1) Your % tax rate in 17 years will be considerably lower than it is today. Currently, people at a low income pay a lower % of tax, so if your income in retirement is expected to be lower than it is today, this could be true. Of course, you are guessing at what Government policy will be in 17 + years, too. 

Gamble #2) You are betting that your rate of return after withdrawl taxes in the RRSP will be higher than inflation, and also higher than the rate of return after taxes in non-Registered investments. This one is trickier. Currently, interest bearing investments have a very low % return. Equity investments (usually mutual funds, in an RRSP) could have a + or - return depending how the stock market does, so they are higher tisk.

Gamble #3) Opportunity cost - You are gambling won't have a need for the cash that saves more/earns more than what you are expecting to get in the RRSP.

Certainly, if you are carrying any consumer debt (more than 5% interest - including charge cards, Apple Financing, etc., basically anything other than a house mortgage or a low interest car loan) use your money to pay these off first before investing. It makes no sense to make 2% inside an RRSP when you are still paying 18% - 24% on a charge card with pre-tax income. If you are carrying balances on charge cards regularly, cut them up - stop using them. Seriously.

The money in your RRSP is not available to you immediately, and cannot be used for security on loans, unlike most unregistered investments. You pay the full shot of income taxes on withdrawl. This means if there is an opportunity or a crisis - for example, a good deal on an investment property that you need a down payment for, or a situation where you need to take extended time off work, or a once in a lifetime opportunity to send your child to a University program... RRSP money is hard to get and may be punitive in taxes to withdraw. So the opportunity cost is that you are foregoing any other uses of the money.

So: Is it right for you? It's better than nothing, and it's the easiest way to enforce savings to commit to contributing the maximum each year to RRSP. Many financial advisors recommend it because the alternative for most people is not doing anything. Whether it is the BEST thing for you (and it may be) depends on a lot of factors. 

You may want to talk to a financial advisor who is not paid to sell you investments, and who has a broad range of experience. A fee-for-service advisor can give you an independent analysis of your situation and goals, and recommend what your best strategies are. This may be useful as a second opinion.

The bank's advisor's job is to see that your money is invested with their bank, and in general (although there are exceptions) their training will be on the types of products and strategies that the bank offers only. 

Ask among your friends who they use, and ask an accountant who they would recommend.

Financial Planners Standards Council
http://www.cfp-ca.org/public/public_choosingaplanner.asp

Gov't of Manitoba has some good advice on choosing an advisor
http://www.msc.gov.mb.ca/education/questions.html

BC Securities commission 
http://www.bcsc.bc.ca/investors.aspx


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## Dr.G. (Aug 4, 2001)

Dave, if you are married, go the spousal route (unless your wife is older than you and makes more than you). In a spousal plan, you get the tax credit for the contribution, but she gets the plan in her name. Thus, if you have a pension and she does not, when she collapses the RRSP, it will be at a lower rate.

Rule of thumb is that products that generate interest should be held inside an RRSP, and dividends and capital gains (potential) products should be outside of the RRSP.


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## used to be jwoodget (Aug 22, 2002)

It's tax deferral but also a tax shelter since the money you put into an RRSP frees up the associated immediate tax hit on it (so you are earning interest on the part that the governments would normally take) plus, since the interest will be higher than an after-tax investment (because its a composite of the contribution + whatever the income tax would be), it compounds faster and is itself not taxed (until withdrawal - based on whatever bracket your income is then). Obviously, this requires that you invest the tax refund into the RRSP and it also depends on what the RRSP is invested in (GICs, bonds, segregated funds, balanced mutual funds, mutual funds, share equity, etc. in order of rising risk and rising benefit).

Dr. G. is spot on with the spousal route, moreso if you have a pension. And don't depend on CPP. If you have significant investment income, your CPP will be deducted in tax. You've no options in this respect. CPP is the low default. Try to spread around your contributions between institutions since this will tend to hedge your bets - likewise, mix and match your risk/benefits in a balanced way so as not to be exposed to a specific segment.


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## PenguinBoy (Aug 16, 2005)

iMatt said:


> 3 - Most people should probably avoid the "Scotia Partners Portfolio" ("fund of funds") mutual fund product they'll almost certainly push on you. These kinds of things are generally high cost, relatively low reward, and great for the bank. I guess it could be OK when you're starting out and until you know a bit more about funds -- assuming you want to put your savings in mutual funds at all. (They will probably assume you want that, so learn about them first and don't let them push you too hard if you just aren't interested.)


iMatt - good post!

I'm curious about you comments on the "Scotia Partners Portfolio". I don't deal with ScotiaBank, and don't own any units of the "Scotia Partners Portfolio", but it seems to me that this is simply an asset allocation service that will rebalance your portfolio from time to time.

What is you objection for this service? Is it that you need to pay a higher MER as you pay for the asset allocation on top of the already high MER for the individual funds? Or do you just not believe that these sorts of products are worthwhile?

What do you think of similar products composed of pooled funds rather than mutual funds, and which have much lower overall MERs?


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## Dr.G. (Aug 4, 2001)

MERs are the death of any investment held over the long haul. They get their MER whether the fund makes money or not. I tend to keep our spousal RRSP in CIBC funds so that we can get the lower MERs and are able to switch between CIBC funds with no penalties. My personal RRSP is 75% stocks, 20% Canada Savings Bonds and the rest in cash and mutual funds.


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## Lawrence (Mar 11, 2003)

I'll have to go over it with my girlfriend later. (She's 7 years younger than me btw,
I read somewhere that if the woman in the relationship is either 7 years older or 7
years younger then the match tends to be a good one)

Thanks for the advice on RRSP's.

D


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## iMatt (Dec 3, 2004)

PenguinBoy said:


> What is you objection for this service? Is it that you need to pay a higher MER as you pay for the asset allocation on top of the already high MER for the individual funds? Or do you just not believe that these sorts of products are worthwhile?


I could be wrong, but based on knowledge of a similar product from the Royal Bank, I thought the Partners Portfolio was a fund-of-funds with a relatively high MER. (And I hope someone will correct me if I'm wrong about that.)

That's my main objection: if you're going to be in funds, you might as well look for good performers that don't charge high fees. It only takes a little research. 

Also, even though I don't want the level of control that comes with investing in stocks directly (too much stress), I do want to have a little more input on how my portfolio is balanced.

There's also the probability of uselessly overlapping holdings, and paying for the privilege.

I have a similar objection to some of the regular funds that my bank (RBC) tries to push on me sometimes. This year it was the RBC Global Titans fund -- big hard sell. Behind the catchy name is a mediocre performer with high fees. And lots of Royal Dutch/Shell shares to boot. I passed.



> What do you think of similar products composed of pooled funds rather than mutual funds, and which have much lower overall MERs?


I wouldn't have an objection in principle. I'm not familiar with those products, but I suppose you get them from specialist companies such as Fidelity?

BTW, I don't want anyone to get the wrong idea: my investment knowledge isn't anywhere near expert; it's more intermediate. (Knowledgeable people will have noticed that, but maybe not those with even less knowdledge than me.)


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## Dr.G. (Aug 4, 2001)

There are always ETFs, which are Equity Traded Funds. Barcley's have various pools of these ETFs at miniscule MERs. They basically track the various exchanges.


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## Sonal (Oct 2, 2003)

Read Investment for Dummies. It's actually a very good primer--huge help to me. At least skim it over before you go into your appointment.

The Wealthy Barber is another good one, and as cheesy as the "story" is, it's ensures that it's not a painfully boring read.

ETA: My personal approach is a variety of index funds, which as I understand it are essentially the same in approach as the ETFs Dr.G mentions. I went through TD's eFunds--very low MER if you manage your account online, which is what I prefer to do anyway.


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## PenguinBoy (Aug 16, 2005)

iMatt said:


> I wouldn't have an objection in principle. I'm not familiar with those products, but I suppose you get them from specialist companies such as Fidelity?


This sort of product is available through RBC as Royal Managed Portfolios, I believe other institutions have similar offerings. The Managed Portfolios are built out of "Pooled Funds" which hold different sorts of assets, such as Canadian Equities, Bonds, etc. The Managed portfolio for a particular investor will be built out of these pooled funds, with the asset allocation determined by risk tolerance, investment objectives, state of the economy, etc. The portfolio manager will rebalance the portfolio from time to time. MER for the top level portfolio is tiered depending on the size of the portfolio, and is usually in the 1 - 2% range. Management expenses for the underlying pools are usually 0.3 - 1% or so, perhaps more for some international pools that have higher expenses.


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## iMatt (Dec 3, 2004)

PenguinBoy said:


> This sort of product is available through RBC as Royal Managed Portfolios, I believe other institutions have similar offerings. The Managed Portfolios are built out of "Pooled Funds" which hold different sorts of assets, such as Canadian Equities, Bonds, etc. The Managed portfolio for a particular investor will be built out of these pooled funds, with the asset allocation determined by risk tolerance, investment objectives, state of the economy, etc. The portfolio manager will rebalance the portfolio from time to time. MER for the top level portfolio is tiered depending on the size of the portfolio, and is usually in the 1 - 2% range. Management expenses for the underlying pools are usually 0.3 - 1% or so, perhaps more for some international pools that have higher expenses.


Interesting. Looks like I don't have enough $$ yet to participate in something like that, but could be worth looking at in a few years.

After a little clicking around, Scotia Partners turns out to be a series of funds-of-funds as I suspected, and the MERs can be quite high, anywhere from 2.19 to 2.75%. The RBC equivalent is RBC Select Choices. 

Maybe I dismiss those kinds of products too easily, but they seem a little expensive for minimal added convenience.


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## Derrick (Dec 22, 2004)

Whatever you decide to do ... I think you are further ahead in that you are thinking about this now rather than later in life.

As many have mentioned, you have to consider your risk tolerance, investment knowledge, etc...

One suggestion I would make is to consider 'Self Directed RRSP's' ... these types of accounts are available at banks/brokerage firms.

The downside: Admin fees of approx $100 to $125 / year
The upside: Flexibility ... you can hold many types of investments in these accounts ... ie. bonds, stocks, mutual funds, GIC's, etc.... Typically, an RRSP account at a bank will limit you to mutual funds only.

For myself, I have felt the flexibility of these accounts make up for the fees.

500 posts ... woohoo


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## Dr.G. (Aug 4, 2001)

Derrick, CIBC's Self Directed RRSP has no fees if your account is over $25,000.


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## Lawrence (Mar 11, 2003)

My girlfriend is suggesting that I should go with ING Direct,
Anyone have an RRSP with them?
They aren't a bricks and mortar company like the corner banks though,
So I'm not sure how that works.

All I can see is RSP's on their website, What's the difference?

D


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## PenguinBoy (Aug 16, 2005)

iMatt said:


> Maybe I dismiss those kinds of products too easily, but they seem a little expensive for minimal added convenience.


Thanks for the reply iMatt!

The advantages I see to a managed product are:
-Avoiding procrastination. I probably have a solid intermediate knowledge of investing, but I don't seem to have the time or inclination to actively manage anything.
-More objective management. Sometimes individuals get a little too close to their investments to be objective, especially when things are moving up or down at a rapid rate.

Not for everyone, and you pay for the convenience, but they seem to have their place.


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## Sonal (Oct 2, 2003)

dolawren said:


> My girlfriend is suggesting that I should go with ING Direct,
> Anyone have an RRSP with them?
> They aren't a bricks and mortar company like the corner banks though,
> So I'm not sure how that works.
> ...


I bank with ING. RSP vs. RRSP--same thing on their site. (This used to throw me too.) It's not a bad place to park your money while you investigate other investment options--you can move things to other RRSPs later on if you choose to without incurring a tax penalty. 

Your RRSP options at ING Direct are:
1) Savings account (currently at 3% interest)
2) GICs (roughly around 4% interest)
3) Various mutual funds purchased through ING's fund company, which would be pretty much the same as buying funds from any other company--evaluate things on a fund-by-fund basis.

With investing, you have to balance risk vs. reward. Basically, low risks=low possible returns, and higher risk = higher possible returns.

In *general* most risks are mitigated somewhat by time. i.e., I have about twice as long as you before I turn 65. Beyond any personal preferences, I can handle more risk because I have more time to recover from them. But note that the 17 years or so that you have is still a significant chunk of time, and you will not be withdrawing all of that money the day you turn 65.

Savings accounts and GICs are about as low risk as you can get. This is generally a good idea if:
1) Your goal (e.g., retirement) isn't very far in the future, AND/OR
2) Your tolerance for risk is low, AND/OR
3) You don't need to your retirement savings to grow aggressively. (This is the tricky one--most of the time, you have to choose between tolerating more risk or tolerating less return.)

It's usually good to have a mix of investments--e.g., some high risk and some low risk. The proportions are determined by your goals, and your risk tolerance. 

So yeah, ING is definitely not a bad idea if you want to park your money somewhere now while you figure out the rest of this stuff. But as you learn more about this stuff, you may find that it's not where you want to put ALL of your RRSP money.

I'm not an expert either--junior intermediate, maybe? But I feel I know enough.


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## iMatt (Dec 3, 2004)

PenguinBoy said:


> Thanks for the reply iMatt!
> 
> The advantages I see to a managed product are:
> -Avoiding procrastination. I probably have a solid intermediate knowledge of investing, but I don't seem to have the time or inclination to actively manage anything.
> ...


I see the advantages too, and I also am not inclined to manage my portfolio very actively -- I adjust it once a year. But I also see a big difference between the managed portfolios and funds-of-funds. 

The funds-of-funds really lack the active management aspect. Instead, they're a convenient way to get a broad asset mix and various fund families without leaving the "sandbox" of your own bank; the price, of course, is paying MERs for the underlying funds and for the packaged product. With my relatively small portfolio, I find that I'm able to get a similarly broad asset mix more cost effectively just by investing in regular RBC funds. It helps that RBC happens to have some of the highest-rated funds among the major banks.

When I'm ready for something more sophisticated, I can either go with a self-directed plan and pick and choose from different fund families, stocks, bonds, etc., or I can go for a true managed portfolio product.


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## mikeinmontreal (Oct 13, 2005)

Check your retirement plan with your employer. You may have a retiring allowance that is subject to tax upon retirement, in which case you would need RRSP room to roll it over tax-free.


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## PenguinBoy (Aug 16, 2005)

Derrick said:


> Whatever you decide to do ... I think you are further ahead in that you are thinking about this now rather than later in life.


Amen, preach it brother!

The sooner you get started, the sooner you can retire -- and RRSP decisions are something that are easy to put off.


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