STRANGE DAYS for retirement savings planning

Obama has been comparing the current economic woes to the Great Depression and Japan's Lost Decade, which followed its stock market meltdown of the early '90s, from which it still has not fully recovered.

Of course, taming your gag reflex so you can eat a cat's breakfast is likely an over-the-top piece of retirement advice. But counting on the government to have enough money to provide for your needs in the golden years isn't all that realistic either. (The Canada Pension Plan, incidentally, lost more than $8 billion in the last quarter, shrinking to about $108 billion.)

For many Canadians, RRSPs remain their best shot at a comfortable retirement. And while thinking about investing may be the last thing on people's minds amidst economic uncertainty, the RRSP contribution deadline cometh.

Although the mantra remains much the same as past years -- contribute as much as you can to reduce your taxes now and reap the rewards of investment growth later -- some financial advisers say you have a few new twists to consider.

At the top of the list is checking your attitude toward investing. The stock market crash has made many of us hesitant about investing, retirement specialist Daryl Diamond says.

"But the reality is that it's far better to invest now when markets are down, than last year when the cost of investing in the market was much higher," says Diamond, a certified financial planner with Diamond Retirement Planning Ltd. in Winnipeg.

"(This reluctance) is a bit strange because there's probably nothing else Manitobans would wait to buy if it went on sale."

Yet it's only human nature to be averse to sinking money in RRSP investment vehicles -- like equity mutual funds, exchange-traded funds and stock -- that are just as likely to drop in value in the short-term as they are apt to appreciate.

Fixed-income investments aren't looking much better. GICs, government bonds and the like may provide capital protection, but with interest rates at near historic lows, your return on investment will be puny.

"After you factor in taxes and inflation, you might even be in a negative return situation," says Wayne Cadogan, a certified financial planner and regional director of Investors Group's downtown branch.

Both planners say equity investments bear further consideration. Stock prices of many Canadian companies were at all-time highs over the last few years, so you paid a premium to get a piece of the action. This year, the thinking goes that what is down must go up at some point, so why not invest for a long-term goal like retirement today?

Still, your investment strategy isn't the only consideration. The Tax-Free Savings Account (TFSA) is an investment growth tool we didn't have available at this time last year, and it's worth your time to figure out how it fits into the retirement planning picture.

"With that new Tax-Free Savings Account, it's a nice problem to have," Cadogan says, adding many investors wonder -- albeit wrongly -- if they should choose one strategy over another.

"That question is similar to the ones we used to get over the years of whether you should pay down your mortgage or put it into an RSP."

After all, when you sell your home, the proceeds are tax-free, right?

"It's really the same concept, but it's just with a different product," he says.

Choosing one registered investment product over another, though, is the wrong way to approach it.

Instead, investors should look for a way to use the RRSP and TFSA in tandem.

"Unfortunately, a lot of people can't afford to do both, but one alternative strategy would be to make a contribution to the RRSP and get a deduction," Cadogan says. "If you get a tax refund, there's nothing wrong with starting a Tax-Free Savings Account with that refund."

In some exceptional cases, Diamond says, lower-income Manitobans may be better served investing in a TFSA over an RRSP because they are less likely to benefit from a tax deduction that would result in a refund of any substance.

Since low-income earners' taxes are already low, the TFSA may prove more tax-efficient for the future, when the government-provided income they rely on in retirement could be reduced by RRSP-generated income. Not to mention, the TFSA is always available for emergencies.

And, of course, we can't forget the ever-present dilemma of whether to pay down the mortgage versus contributing to a RRSP.

"In the past, most people would contribute to the RSP and generate a refund and apply that refund against the mortgage," says Mark Anderson, lead mortgage broker with the Anderson Financial Team of Mortgage Intelligence.

"Going forward, we really have to scrutinize the mortgage along with the investment portfolio at the same time."

Consider that your mortgage interest rate may be as low as it will ever get. Couple that with the investment alternatives -- fixed income that preserves capital but offers paltry returns or the downtrodden equity markets, which may not recover any time soon.

"We're going to be dealing with high interest rates down the road and at some point, that mortgage will be up for renewal," Anderson says.

Payments on a low-interest mortgage go a lot further toward paying down principle, and you will save on interest costs in the long run. The strategy might not have always been the best of choices when other investments offered larger-percentage returns over the interest rate on the mortgage, and it may still not be the best one for everyone.

So, sharpen that pencil, fire up the calculator and do the arithmetic.

And if you don't already have access to it, seek out advice you can trust because you might be missing parts of the retirement equation and planning your future on bad money math.

"That's why it's not as simple as people think -- one, two or three: Take your choice," Cadogan says. "There are lots of variables that go into making good decisions when planning for your financial future."

Let's hope cat food as a meal choice isn't part of that.

giganticsmile@gmail.com

Making your RRSP work

2008 RRSP contribution deadline -- March 1

Maximum RRSP contribution limit for 2008 -- $20,000

Limit for 2009 -- $21,000

Limit for 2010 -- $22,000

Take note that your contribution limit may be higher if you have unused cap space since 1991.

What if you exceed the limit? When you exceed your yearly limit (and you have used up additional cap space from past years) by more than $2,000, you will pay the government one per cent a month on the amount over that limit.

-- Canada Revenue Agency

Worried about clawbacks on Old Age Security?

The Tax-Free Savings Account may be more tax efficient down the road for low-income earners today. First, they don't earn much now, so their tax savings today are less than those a higher earner would get from an RRSP contribution. Second, the RRSP-generated income in retirement can lead to clawbacks on OAS. But there are two other important issues to consider. Obviously, if you have a very low income, saving may not be an option, so why worry about tax efficiency in the first place? Second, the clawback rates on OAS do not affect seniors until they reach an annual income limit of about $63,000. The TFSA vs. RRSP debate in this case may be a non-issue.

Spread it out

Rather than making a lump sum contribution before the deadline, it's better to make regular contributions throughout the year. "Why don't you average the cost of buying by contributing on a monthly basis and that gives you an average cost?" suggests Wayne Cadogan, certified financial planner with Investors Group. "That will be cheaper over the long run than if you just wait until one point in the year where you have to time the marketplace." Still, if you haven't been able to use that strategy, then it's better to contribute right before the deadline than to not put anything into your RRSPs at all.

Republished from the Winnipeg Free Press print edition February 22, 2009 B6