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TORONTO, ONT- 02/03/09 - Signs advertising RRSPs and other investments in downtown Toronto as the RSP deadline looms. Experts say the numbers of RSP investors is way down from the norm. (Photo by Peter Power / The Globe and Mail)pmpPeter Power/The Globe and Mail

The clock is ticking. With the March 1st RRSP contribution deadline approaching fast, you might be one of the many Canadians struggling to make a last-minute decision.

Finances are tight. Do you make an RRSP contribution, pay down debt or put money into a TFSA? If you do decide to go the RRSP route, how should you structure your portfolio? How much do you need for a comfortable retirement?

Malcolm Hamilton, an actuary at Mercer Human Resource Consulting and an expert on Canadian retirement saving, will answer your RRSP-related questions. His answers to questions that you have already submitted will be posted on Friday Feb. 26th.

For more stories, tips and earlier discussions to help your prepare for the final RRSP push, check out our special site.

Mr. Hamilton is a principal and worldwide partner of Mercer. He specializes in the design and funding of employee benefit plans in both the private and public sectors, with particular emphasis on registered pension and savings plans, unregistered pension plans, and retirement compensation arrangements. He is a frequent speaker at pension conferences, and has had papers published by the Canadian Investment Review, Benefits Canada and the Canadian Tax Foundation.

Editor's Note: Many readers sent in their questions on Wednesday. Mr. Hamilton's replies are below. Thanks to everyone for participating, particularly to Mr. Hamilton for giving us so much of his time.

1 - Shaun writes:

Hi Malcolm,

Very much appreciate your advice. I am a young professional at Agrium. We have a DCP whereby I contribute 6% of my salary and the company provides 9%. I also contribute a couple of thousand into a high-risk RSP. With the advent of the TFSA, I have preferred this means of investment since I am not taxed on the gains (I would like to retire early). These days I try to max out the TFSA before touching the RSP. Do you agree with my strategy? Thanks.

Malcolm Hamilton: RRSPs and TFSAs are both excellent retirement savings vehicles. TFSAs are preferable if you expect your tax rates to be higher after retirement than today. RRSPs are better if you expect your tax rates to be lower after retirement than today. Since it is impossible to say with any confidence what will happen to your tax rates between now and retirement, it is impossible to say whether you are better putting your extra savings in an RRSP or a TFSA. So pick the one you like and don't worry about it. Both are good...and with 15% of salary going into a DC pension plan, you have an excellent start.

2 - Simone writes:

I am getting close to retirement and many people have told me to convert the equity portion of my portfolio to safer more conservative investments like GICs and bonds. Do you think this is a good idea? Should I keep some in equities in order to stay ahead of inflation over the next 25 years of retirement?

Thank you.

Malcolm Hamilton: Simone, as a rule you should gradually reduce your equity exposure as you approach retirement because it is hard to recover from losses when you are close to retirement...you just don't have enough time. Unfortunately, this is a bad time to be jumping into safe investments because interest rates are so low. Many retired people keep 25% (or more) of their money in equities throughout their retirement years. This is a good idea as long as you aren't risking money that you can't afford to lose.

3 - Novarro writes:

Hi:

Excluding Company and Government pension plans, how much is required in a RRSP & non-RRSP savings accounts to generate approx. $20,000:00,

After tax, per annum.

Thank you.

Malcolm Hamilton:

Novarro,

If your marginal tax rate is 33% after retirement (say), you will need to withdraw $30,000 per annum from an RRSP to clear $20,000 per annum after tax. An annuity paying $30,000 per annum might cost $500,000 (allowing for 2% inflation protection and a 60% survivor benefit); so that's what you would need in your RRSP. If interest rates go up you will need less than this; if they go down you will need more.

You would need less than $400,000 outside an RRSP to generate $20,000 per annum after tax because you pay tax only on the investment income generated by your unsheltered savings, not the original capital.

4 - Jim writes:

Several years ago, you were of the opinion that $300,000 in retirement savings for an individual Canadian, when coupled with government programs, was sufficient for a comfortable retirement. Does this number still apply?

Thanks very much.

Malcolm Hamilton:

Jim,

It would probably be a little higher today due to inflation and lower interest rates. However, this number is for the average Canadians retiring at 65, not a reliable number for every Canadian. Some need much more. Others need much less. With $300,000 in an RRSP and full CPP and OAS benefits, a retired Canadian would have an annual income of about $30,000 after tax. If you have a mortgage-free home and no children to support, this should provide a better-than-average standard of living.

5 - Larry writes:

I want a return. Nervous of the stock market at the moment, thinking it's going to tumble. 1.5 - 2% GIC's aren't of interest, sitting in cash waiting for that market to tumble so I can jump on board. Are there any returns around while I am waiting?

Malcolm Hamilton: Larry, I'm not a market timer so I will let you decide whether the market is about to correct. If your plan is to park your money somewhere liquid and safe and then to put it back in the market after the decline, you will have to accept a low interest rate because that's all you can earn on safe, liquid investments today.

Good luck!

6 - Chris writes:

My Question is: "Is Labour Sponsored Fund a good investment for RRSP or TFSA?" Hope you can comment on this. Thanks.

Malcolm Hamilton: Chris, I'm not a tax expert...nor do I know much about Labor Sponsored Funds. The important thing is to first satisfy yourself that your Labor Sponsored Fund is a good investment. Only then should you look at the tax angle. A bad investment is a bad investment...no matter where you put it.

7 - Barry writes:

Is the income generated within a RRIF not taxable (like with an RRSP); and is RRIF withdrawal income taxed just as "other income" (i.e., like interest income), without the need to calculate any capital gains made within the RRIF?

Malcolm Hamilton: Barry, the answers to your questions are yes and yes. Investment income earned in a RRIF is not taxed until it is withdrawn. All withdrawals are fully taxable without regard to whether they come from dividends, capital gains, interest or the amounts originally contributed .

8 - Myrna writes:

My husband (59 years old)is retiring March 31st and he has options to choose from either guaranteed pension for 96 months or joint and 60%survivor pension. The difference is $218 per month for the survivor option. In the event of his death, the spouse would receive 60% of the pension amount which would add up to $1200.00 per month. My question is would it be better to take the full pension and purchase a life insurance policy or take the survivor pension option? I have checked out insurance quotes and the costs are almost equal for the policy at $300,000 and the difference in survivor option over a 20 year period but at $1200 a month I would not be able to stay in the house whereas with an insurance policy I could and still have money to leave my children.

Malcolm Hamilton: Myrna, usually you would be better off taking the reduced pension with a 60% survivor benefit. But you are right...a $300,000 death benefit is worth more than a $1200 monthly survivor pension. So I'm puzzled. All I can say is that you better make sure that you understand what you are buying. Remember that a $218 reduction in your husband's pension doesn't cost you $218 a month because the lower pension means lower taxes...so the after tax cost may only be $150 or so. And be careful that the insurance premium doesn't increase as your husband grows older. Also, make sure that the insurance policy doesn't expire after 20 years...because your husband might live longer than 20 years and you will lose your protection if he does.

Be very careful.

9 - Jim asks:

I have a TFSA for my son who is currently in grade 8, with a monthly contribution. I'm trying to set aside extra money for school with the knowledge he will be done high school in about 5 years. I want a low risk investment so currently am in money market account to be safe. My financial advisor is suggesting I go to a mortgage fund (95% residential mortgages guaranteed under NHA). Do you think this would be a good move?

Malcolm Hamilton: Jim, a good mortgage fund will get you a better return for a little more risk. Just make sure that the fund you choose has a reasonable MER.

There really isn't any advantage to investing your TFSA in a money market fund today. You are earning a 0% return and 0% returns aren't taxable no matter where the money sits. So if I was you, I would take a little more risk and try to earn a little better return. But don't get greedy. If you need the money in 5 years to send your son to college, you can't afford to take much risk.

10 - A reader who identifies themself as Independently Poor writes:

Two questions for Mr. Hamilton:

Please comment on the strategy of a moderate income person ($60k to $90k) using RRSPs to fund the pre-65 portion of retirement and then using TFSA and other unregistered savings to supplement OAS/GIS/CPP post-65.

As I understand it, CPP is taxable income. Is it better to take the CPP at 60, receiving a reduced benefit for a longer time, in order to reduce post-65 clawback of GIS benefits?

Malcolm Hamilton: Using an RRSP to fund your pre 65 retirement income and a TFSA to fund your post 65 retirement income is a good strategy if your post 65 taxable income will be low enough to qualify for GIS benefits.

And yes, if you retire at of before 60 you are better off drawing the reduced CPP benefit starting at 60 than the unreduced CPP benefit starting at 65 because the 30% reduction is advantageous (although this will probably change in a few years) and because, if you are going to collect GIS after age 65, the reduced CPP benefit means lower claw backs and larger GIS benefits.

11 - LC Oscare writes:

I have a large educational credit that I am carrying over from last year, does it still make sense to contribute to an RRSP?

Malcolm Hamilton: LC, if you aren't paying income tax right now and you have money to invest, you might look at paying down debt and/or contributing to a TFSA. If you've already done these things, you can contribute to an RRSP and deduct the contribution in a future year when you will have taxes to pay...but there's no real advantage to contributing today.

12 - Mark writes:

What are your thoughts on the Smith Maneuver as a long-term investment strategy [...]o pay down a mortgage and build a good retirement nest egg?

Malcolm Hamilton: Mark, I used the Smith maneuver in the 1980s...before anyone had attached a name to it. There are two separate aspects to the maneuver. First, you pay down your mortgage. This is always a good idea...you earn an after-tax, risk-free rate of return equal to the mortgage rate. Everyone should do this as long as they aren't depriving themselves of a decent standard of living.

The second part of the maneuver, borrowing money to invest outside a tax shelter thereby making the interest on the loan tax deductible, is sometimes a good idea. It worked well in the 1980s and 1990s when the stock market did well, but it was less successful in the 2000s because the markets (in particular the US stock market) did not do well. In normal times borrowing to invest works well, but you need to make sure that you aren't taking risks that you can't afford to take...otherwise you get crushed when years like 2008 roll around. Be particular careful as you approach retirement because you may never recover from large losses late in your working life.

13 - Another reader writes:

I am retiring this year and will collect a PSSA pension. I also will receive a generous retiring allowance and payout of approximately $150,000. I have rrsp room for most of this. Is that the best course of action? What would you suggest?

I am 62 years old and my wife is 60. She collects cpp and I will apply when I retire.

Malcolm Hamilton: Sounds like a good plan as long as you don't need the after tax portion of the $150,000 to pay down your mortgage or other debt with non deductible interest. I believe that there is an old provision in the ITA that lets you transfer $2000 of your retiring allowance to an RRSP for each year of pre 1996 service (with your current employer) without reducing your unused RRSP room. You might want to look into that.

14. Eve writes:

Good morning

1) I have my retirement funds (RRSPs + 2 "rolled over" pension plans) in mutuals with RBC,

low-moderate risk.

2) Also own a rental with about $100K+ equity (price down about 15% from 2008)and a lake lot which is up for sale (80-90K, bought for $25K, capital gain tax this year).

3) $73K invested with ING @ 4% GIC, not registered (tax on interest), matures this fall

4) Own my condo loft/no mortgage, worth <250K - in Edmonton. Planning to rent part of year as a "luxury" vacation home thru' an agency on a weekly/ or monthly basis - central downtown in a unique heritage building. My expenses here are < $ 400/month.

I have "retired" (2007) and retrained as a career practitioner; I also do training thru' my company (former industrial microbiologist for <40 years) for Foodsafe, WHMIS, QA consulting, etc

5) Took CPP early = > $9K pa, OAP = $6480 pa

6) My new job is low pay ( Case Manager @ non profit, approx $39K pa)

7) Planning to top up my TFSA to $10K this year (going to start masters in Counselling Psychology at UVic P/T in 2011), while earning P/T

5-Year OBJECTIVES

1) keep my income under $63K to avoid OAP clawback

2) no draw from RRSps until I am 70/71, barring emergencies!

3) buy a small condo in downtown Victoria eg $200-$250K, currently some are selling above

asking price; work in Edm/Victoria (grandchildren here!)

4) work less, earn more! I get my Diploma (already have Certificate) and Canadian

certification as a Career Practitioner this May when I complete 3000 "practicum" hrs

of approved employment, can do contract work &/or have my own practice + teach

or do industry training, which is more lucrative.

5) Also completed an Adult Education Certificate at U of A in 2008

STATUS: divorced -single parent with 3 adult children, 2 grandchildren (male partner of 5 years in Victoria - we live independently, as we did in Edmonton).

QUESTION:

I need a mortgage of about $100K for a year (selling Edm rental in 2011), my bank has pr-approved this, or I can do as a new HOLC both @ 2.75% - 3% currently (1 year closed may be safer)

Can I convert my RRSP funds to a "self-directed" account and provide my own mortgage in this way?? If so, would it be safe to do so??

I would really appreciate some help/advice!

Reading up on these options now; lower-priced condos in downtown Victoria are selling fast, unit in new, concrete LEED buildings for <250K with a built-in rental management if I am away travelling, or working in Edmonton

I do not need to touch my RRSPs, now <$200K, due to 2007/8 losses, but moving up now.

Malcolm Hamilton: Eve, if you need to borrow $100,000 for one year and the bank will lend it to you for 3%, go ahead and do it...but make sure that you do it in such a way that the interest ($3000) is tax deductible if you can manage it.

It's not clear to me why you need to borrow the $100,000. If you are borrowing to buy a condo in Victoria it might be safer to wait until you sell the rental property. Otherwise you end up owning three properties at the same time...and if the bottom falls out of the housing market, you will get crushed.

It sounds like you have a lot going for you. You probably don't need to take big risks, so be careful.

15 - Betty writes:

I'll be retiring in approximately 10 years and single, I have over $100,000 invested in mutual funds . I also have some stocks with dividends outside my RSP. I would like to do invest in something else besides mutual funds. What else is there?

Malcolm Hamilton: Betty, Exchange Traded Funds (ETFs) are like mutual funds but they trade on the stock exchange like stocks. They usually have lower investment fees and better returns than mutual funds. So check them out!

But before you do, give some thought to how much risk you should be taking...because once you get within 10 years of retirement you should be looking for opportunities to gradually reduce your risk exposure, either by cutting back on stocks and/or by diversifying and/or by picking equities that perform well (relatively) in down markets.

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