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Winnipeg Free Press - PRINT EDITION

RRSP season not best time to invest

But it is a good time to start the conversation

By: Moshe Milevsky

Posted: 02/8/2012 1:00 AM | Comments: 0 (including replies)

You might be surprised to hear that this year's RRSP season is the worst possible time to make an RRSP contribution. In fact, it's not only this season that's the problem. I have the same 'issue' every year.

As you know, money inside an RRSP grows tax sheltered until you withdraw the funds. The sheltered growth is one of the two great reasons to participate in the program. The second is the tax deduction, which leads to a nice refund in springtime.

But, when you think about it carefully, the contribution for the 2011 tax year could have been made as early as January 1, 2011. That money could have grown tax-sheltered for the last 14 months. And, if you didn't know how much you could contribute until the CRA informed you after filing in spring 2011, you should have made the contribution then. March is neither here nor there.

So is RRSP season misguided? I don't think so. In my mind, the benefit of RRSP season is the inevitable conversations about retirement they generate -- something that might be as important as the money itself. The advertising reminds Canadians about the looming milestone in their life. To get those conversations started, here are some talking points.

1. How long will your RRSP (a.k.a. retirement nest egg) last, if you were to stop contributing today, and instead withdraw a fixed amount each year while earning a fixed interest rate?

Although neither of these fixes are realistic in practice, this sort of analysis provides a sobering assessment of whether and when you can afford to retire. The underlying mathematics of this calculation is trivial, and does not require any complex retirement planning algorithms. In other words, you -- or your financial adviser -- can't hide behind optimistic projections.

2. Given your family history, current lifestyle and recent medical events, what are the chances that you, your spouse, or both of you, will reach the age of 90, 95 or even 100?

Go online, talk to a medical professional, consult an actuary and learn the odds. In other words, get to know your longevity risk.

3. Does your company offer a true pension?

Dig deep into the mechanics of your employer's retirement plan. Many are called pensions, but are basically pooled savings. If you don't have a pension - a promise of real lifetime of income - then consider buying one, eventually.

4. How important is it for you to enjoy your money now versus later?

The industry talks about replacing 70 per cent to 80 per cent of your income in retirement. But do you want the exact same standard of living regardless of how long you live? Or are you willing to scale back and instead enjoy the money earlier on? This is your subjective time preference. One size doesn't fit all.

5. How comfortable are you with stock market risk?

The last 10 to 15 years have taught us that time doesn't necessarily diversify away risk. Stocks - which fluctuated more than bonds - earned less than bonds during the last 25 years. Whether this persists going forward is debatable. But if stocks continue their lacklustre performance - and the economy sputters - will this impact your job? In the language of financial economics, is your human capital and financial capital intertwined? If so, you might want to lay off the stocks in your RRSP. Asset allocation should involve your entire balance sheet.

6. What do you plan to leave the kids? Is this a priority for you?

I have seen many people who are close to or in retirement who dedicate a particular account, asset or sum for their loved ones. For example, it is not uncommon to hear that the house is going to the kids, or that the GIC will eventually go to the grandkids. This is commendable, but is it financially efficient? If legacy is your motive, you might want to see what life insurance can do for you. And vice versa, if you have life insurance - paid up or not - but need the money earlier, then you might want to think about giving it up.

-- Postmedia News

Moshe A. Milevsky, Ph.D. is a professor at the Schulich School of Business at York University in Toronto. He is the author of the forthcoming book The 7 Most Important Equations for Your Retirement ... and the Stories Behind Them" (Wiley, 2012).

Republished from the Winnipeg Free Press print edition February 8, 2012 E4

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