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Inside the Market Gordon Pape’s mailbag: Maximizing retirement savings, TFSA losses and what to do with cash

The questions have been piling up in my inbox, so let’s deal with some of the issues that are of concern to readers.

Investment confusion

Q – We have been purchasing your books for years and done well with your advice. Thank you.

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My husband and I just retired. We have no debt and have a reasonably good income. We have $50,000 to invest and have not taken advantage of the TFSA yet. We are also planning to invest more into RRSPs this year. Trouble is, where to invest?

My husband’s investments in U.S. mutual funds have done extremely well, whereas my Canadian investments have performed moderately. With so much global uncertainty around trade, we’re puzzled. What would you suggest? – Linda

A – You’re asking the wrong question. Your first priority should to decide what you want to achieve. Growth of capital? Income? Safety? Once you have determined your objectives, that narrows the field of appropriate securities considerably.

Since you are both retired, I would think that a combination of cash flow and safety of principal would be at the top of your list. That would suggest you should focus on high-quality dividend paying stocks or ETFs. You should also include some bond funds as a cushion against a possible stock market retreat.

By all means, open TFSAs for both of you. Depending on your income level in retirement, they may be a better choice than adding to an RRSP. – G.P.

Wants U.S. income

Q - I recently sold my house in Arizona and accumulated some U.S. dollars in my savings account. I plan to become an active snowbird in the U.S. and want your opinion on where I should invest these funds to keep them relatively safe and still produce 4-5 per cent income yearly that is predictable. – Murray S.

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A – Given your parameters, I suggest you consider some lower-risk, high-yield U.S. stocks. AT&T Inc. (T-N) is one possibility. It pays a quarterly dividend of 51 US cents per share (US$2.04 annually) to yield 6.6 per cent.

Another telecom to look at is Verizon Communications Inc. (VZ-N). It pays 60.25 US cents per quarter (US$2.41 annually) to yield 4.2 per cent.

Neither stock is bullet-proof in a market correction, but any losses should be minimal. - G.P.

What to do with cash?

Q – We have cash from selling off some equities earlier. It is earning 3 per cent at RBC for six months. An adviser there is suggesting that we invest part of this cash in the RBC Select Balanced Portfolio, a fund of funds. We have always been a bit leery of bank products and would appreciate your opinion on this. Also, with this kind of fund, do they charge management fees per fund as well as the overall fund fee? – Edna C.

A – The banks are like all other mutual fund companies – they have some products that are very good, some that are very bad, and some that are simply mediocre.

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I would rate this one in the good category. It holds about 41 per cent of its assets in bonds and cash, with the rest invested in various RBC equity funds. The management expense ratio is 1.94 per cent. You don’t pay anything on top of that to the other funds in the portfolio.

The fund lost 3.6 per cent in 2018 (the first annual loss since 2011) but was ahead 5.5 per cent for the first two months of 2019. The three-year average annual rate of return to the end of February was 6.5 per cent. That was good enough to rank number 28 in the Global Neutral Balanced category, out of a total of 1,095.

The bottom line is that this is a respectable fund. It won’t make you a lot of money, but you’re unlikely to lose much either. – G.P.

TFSA losses

Q - My question is about Tax Free Savings Accounts and selling a stock at a loss. Suppose I purchase shares in a company for a total of $5,000. I then sell the stock for $2,500 for a loss of $2,500. But I don’t take the money out of the TFSA. Can I contribute $2,500 right way back into my TFSA? Or do I have to wait till the following year and my limit will be increased by $2,500 due to the loss? – Randy W.

A – Sorry to be the bearer of bad news, but losses on securities within a Tax-Free Savings Account are not recoverable and do not add to your contribution limit. If you had withdrawn the $5,000 directly and then bought the stock, you would have been able to recontribute the $5,000 in the following year. But under the scenario you describe, that $2,500 loss is simply gone. – G.P.

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Saving for retirement – and more

Q – I have a question about investing in my retirement. I just turned 41. I have no debt except our mortgage, which will be paid off in nine years. I have no investment savings. I am a stay-at-home mom. I do work occasionally; I bring home about $3000 a year. My husband is the breadwinner and he has retirement savings.

I just recently read your book, “The Ultimate TFSA Guide," thinking this would be my best option to start off with. I would only be able to afford about $200 per month. I also would like to have an emergency fund. So, my thoughts are for the emergency fund I open a TFSA with some cashable GICs.

For my retirement fund, I realize I will have to be more aggressive to really get caught up, so I am thinking stocks and EFTs. I have done a lot of reading on the subject of investing, but it still does not make sense. I am just not sure where to put my money to get the best bang for my buck.

I have spoken with our adviser at Investors Group, one at my credit union, and an acquaintance at RBC. All suggested mutual funds. I also checked out PC Financial because of the fact that they pay interest when the balance exceeds $1,000, but right now their interest rates look very low. I guess I am asking who and where to give my money to. Thanks. – Carrie

A – In investing terms, you’re trying to match apples and oranges. Let’s separate the two.

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As far as an emergency fund goes, yes, a TFSA is a good idea and cashable (also called redeemable) GICs are one option. However, their rates are lower than locked-in GICs and there may be penalties for redeeming early. Check the terms carefully. An alternative is a high-interest savings account or a short-term bond fund. More on that to follow.

Saving for retirement requires a different approach, as you are aware. The advisers you consulted all recommended mutual funds for the simple reason that’s what they sell, and they earn commissions from them. However, mutual fund fees can be expensive and eat away at your savings.

An alternative is to open a TFSA with a discount broker. Try to find one that does not charge a commission on ETF purchases.

Direct the amount you want to go into an emergency fund to a high-interest savings account or a short-term bond fund such as iShares Core Canadian Short Term Bond Index ETF (XSB-T). It gained 2.69 per cent in the year to Feb. 28 and has a low management expense ratio of 0.17 per cent. Build the emergency fund to your desired level first.

Then add some low-cost growth index funds. The iShares Core S&P 500 Index ETF (CAD hedged) (XSP-T) has an MER of 0.11 per cent and an average annual gain of 13.8 per cent over the three years to Feb. 28. To further diversify your retirement portfolio, include a bond ETF, a Canadian stock ETF, and an international stock ETF.

Over time, you’ll build a healthy retirement fund, with some emergency money always available. And when it comes time to withdraw some cash, it will all be tax-free! – G.P.

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If you have a money question for me, please send it to me directly at gpape@rogers.com. Write Globe Question in the subject line. I cannot guarantee a personal response but I will answer the most interesting questions periodically here.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

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