RRSP and Every Related Term – The A to Z

RRSP

You can’t work forever, so it is essential to save for your retirement years. It is also important to save for other momentous life events like your child going to university or college. Depending on your savings objectives there are a number of saving plans you can use such as an RRSP, TFSA and RESP.  Here is a guide to some of the popular savings accounts in Canada.

What is a RRSP?

An RRSP is a registered retirement savings plan. This is a personal savings account with special tax benefits. Under this plan, your contributions are tax deductible up to your contribution limit. Your investments are also able to grow tax-free while inside the plan. RRSPs also give you another tax advantage. When you do pay taxes on your investments, they will likely be taxed at a relatively low rate since you are likely to withdraw the bulk of the cash when you are retired and presumably in a lower tax bracket.

What is a TFSA?

A TFSA is a tax-free savings account. You can put aside money in a TFSA so that it grows tax-free inside the account. You can withdraw this money at any point in the future. TFSAs are great ways to create an emergency fund and supplement your retirement savings.

What is an RESP?

RESP stands for registered education savings plan. For many people, paying for their children’s post-secondary education is a primary concern. An RESP allows parents, grandparents and friends to contribute towards building a fund for a child’s education. The contributions are not tax deductible, but the interest earned on the contributions inside the plan is not taxed until it is paid to the student and is taxed to the student.

How to pick the perfect plan?

An RRSP is an important retirement savings vehicle. It is also a good way to invest tax refunds especially if you want to use the money to buy a home. TFSAs are good tools for short-term and long-term savings. It is more liquid than an RRSP and allows you to invest in a range of investments tax-free. If you have children or grandchildren dependent on you for their education, opening up an RESP is a must. This account can be started even while your child is still in diapers, so long as there student has a Social Insurance Number.

How to get started

The first step is to do your homework and look into the various options available. Now, you may read a lot of information online and in magazines but this won’t make you an expert. That is why it’s important to talk to a financial advisor. An advisor can help you understand the pros and cons of each plan and determine which one is best suited to you. That’s not all. Your advisor will also help you complete the formalities and necessary paperwork. Once your investments have been made, an advisor can help you review your portfolio regularly.

This post contains sponsored links from Sun Life Financial.

The ‘Forget About It’ Retirement Portfolio

 retirement and saving

When it comes to investing for retirement, most people want an easy, but effective, strategy. You don’t want to spend hours each week researching stocks, tracking your portfolio and constantly buying and selling. You want a solution that is simple, that performs well and that can mostly be left alone to grow until you are ready for retirement.

 

If you want to start investing for retirement, the first step is to select one or more retirement vehicles, or specialized retirement accounts within which your money will grow. The most common retirement vehicles are 401(k)s, Individual Retirement Accounts (IRAs) and Roth IRAs.

 

Once you have selected the right retirement vehicle, the real work begins. You will need to select the portfolio investments that can help you meet your financial goals. This is the step that most investors fear. But don’t worry; we have a few tips to help you set up a low-maintenance portfolio that will make money while you go on with your life.

 

Invest in Funds That Mimic the Market

 

Every investor dreams they will pick all the right stocks, earn returns that are greater than the market average, and retire early and wealthy. While some people do, in fact, beat the market in the short-term with a series of high-risk stocks, this does not happen for the average investor.

 

The easiest way to build wealth for retirement is to focus on trying to match the market. Over long periods of time, the market will always grow; historically, the stock market averages about a 7 percent annual return.

 

Consider: Exchange-traded funds (ETFs) for a simple, flexible investment option. Most ETFs track indexes and then try to match them as closely and cheaply as possible. Unlike most mutual funds, ETFs trade on exchanges, which means you can buy and sell ETFs anytime the market is open. Investors like using ETFs versus mutual funds because fees are low and, most of the time, you don’t pay taxes until you sell and efile your return for the year.

 

Diversify Your Portfolio

 

As the old adage goes, “Don’t put all your (nest) eggs in one basket.” A good portfolio usually includes at least a few different types of investments. At the very least, you’ll want a mix of stocks and bonds.

 

But don’t go overboard trying to invest in as many options as you can. In his article in Forbes, investment manager Kenneth G. Winans recommends keeping your portfolio as low-maintenance as possible by not holding too many investments. Fewer investments, he says, ensures that you will have an easier time keeping track of it all.

 

Consider: Mutual funds, which spread out your investment (and therefore your risk) among a large number of stocks in a variety of sectors and industries. The inherent diversification of mutual funds balances any significant losses in one investment with gains in another. Mutual funds also come with a fund manager who will do all the researching and trading for you.

 

Buy and Hold

 

If you are saving for retirement, you should be investing in companies that have staying power, not wagering your life savings on trendy, high-risk companies that could be out of business by the end of the year. Choose “set it and forget it” investments that can be purchased and then left to grow until retirement.

 

Consider: Stocks in long-term businesses. James K. Glassman, author of “Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence,” suggests purchasing stocks in solid, long-term companies like Boeing, the biggest aerospace company in the world. Also think about investing in companies that have been around forever, such as Cisco, General Mills and Coca-Cola.

 

Image credit: http://401kcalculator.org

 

 

 

How To Be Richer At Retirement Than You Are Today

The world is changing. There is speculation that the younger generations may have to work to death. Pensions from the state are now no longer guaranteed to be enough to live on. And the retirement age before receiving it keeps getting pushed up and up. Sadly there is no guarantee that you will be in good enough health to enjoy retirement by the time you reach that age either.

None of us wants to be working when the body and mind are tired. We want a few years to enjoy life once the kids have grown up and moved out. Many of us dream of traveling and taking luxury holidays to enjoy our later years. The private pension pots of the 1980s simply aren’t around anymore. Instead, we need to find other ways to finance our twilight years. And if you want to enjoy your sixties free of work, you’re going to need even more cash behind you.

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So what can you do right now to ensure you can enjoy your life before old age and ill health force you to stop working? How can you possibly choose to retire early enough to be sure you can take those holidays and participate in those activities you’ve dreamed of? There are plenty of ways you can invest right now to help you ensure a good return when you turn sixty. Of course, you might love working so much you choose to stay on. But wouldn’t it be nice to have that choice?

 

Investments

Investing now should give you a return worth your time and effort. When we talk of investments, you might think of stocks and shares. Indeed, the stock market has made a lot of people comfortable in their retirement. The idea is to invest in stocks or shares that are likely to increase in value. You might choose to invest in a small company that is on the up. As their business increases, their value also goes up.

 

The stock market is affected by many things, both positively and negatively. No investment is entirely guaranteed, but there are ways to invest with lower risks. Picking companies carefully is key. You’re looking for businesses that have a proven track record and a good return on investment. Over the next few years, you may choose to sell and then invest what you’ve earned elsewhere. A good stockbroker should manage all this for you.

 

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Commodities can also be bought and sold as the price fluctuates. You might invest in things like coffee or oil. Over the years the price will fluctuate. You need to buy when it’s cheap but ready to rise. Then sell just as the price peaks to make the biggest profit on your investment. It’s all about the return you get.

 

You may also choose to invest in more stable things like gold or silver. The price does fluctuate. But historically it hasn’t wobbled quite as much as some other investment opportunities. Where you buy your precious metals from may affect your return. You need a respectable dealer who offers a fair price. For example, you might buy silver coins at Atkinsons Bullion because you want to buy at a fixed price with the option to sell the silver back later on.

 

Savings

Those of you that are cautious about money may choose to pop your cash into a savings account. There are often tax-free savings options available that you should certainly take advantage of. However, many savings accounts offer very little interest. You could also be taxed on the little interest it makes.

 

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The key to using savings as a good way to grow your cash is to shop around. Find the best interest rates to help your money earn for you. Often, the more you put in, the higher the return. You could save tax-free to the limit, and then move that lump sum to a higher interest account. It’s a very good idea to put a portion of your monthly wage into savings.

 

When we’re young, we need to save up to pay for a wedding, buy a house, or send the kids to college. This is far better than using loans to cover the cost. Loans attract interest payments. You will be paying substantially more back than you ever borrowed. If you can save up for it, do so, to save you thousands in repayments. Even if you keep emptying it to cover the cost of big expenses, it will be beneficial to you in the long term.

 

Property

Many people are keen to invest in bricks and mortar. It is rare for a property to reduce in value over a couple of decades. That’s not to say it doesn’t happen, but it is usually a good place to invest your cash. When you buy a second or subsequent property, you don’t need to wait twenty years to reap the rewards. Instead, you can start earning straight away by renting it out.

 

Becoming a landlord doesn’t need to be stressful either. You can leave all the hard work to a property management firm. They’ll take care of keeping the property in tip top shape, and finding you good tenants. Your income will, however, be greatly reduced, as the management firm will take a substantial cut of the rental earnings.

 

If you can pay cash for a property, you can start earning straight away. Paying off a mortgage can be very expensive. Generally speaking, you will pay three times the original asking price over the twenty-five year term of a mortgage. The property may well be worth even more than that over time. But it cuts into your profits. The smaller your mortgage the better. Shop around for the very cheapest interest rates so you have less to pay back.

 

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Of course, we all need somewhere to live ourselves. To maximize your chance of a comfortable retirement, live as frugally as you can. If you don’t need a big house, don’t buy one. Small houses are cheaper to heat and maintain. They also attract smaller local taxes. And once you’ve paid off the mortgage, the house is yours, rent-free forever. You can sell it or leave it for your children to inherit. Chances are you’ll want something different by the time you are retired.

 

Pensions

Most of us rely on a pension when we retire. We spend our working days paying into a pot that provides an income once we reach a specific age. This amount income is rarely guaranteed these days, but it is guaranteed in terms of providing you with something until the day you die. The problem is, that income may not be enough to live on.

 

The idea is that the more you pay in, the bigger your monthly return when you reach your agreed retirement age. You can increase the pot by retiring later, or paying a larger amount in each month. Many pension pots are invested in the stock market. If the stock market falls, your pension will fall. Interest rates can also affect the value of your pension.

 

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Pensions sometimes offer a variable income, and this can make budgeting when you retire very hard to do. This is why so many people use other investments in addition to their pension. It helps to ensure they can afford to live comfortably when they stop working. It may be unwise for you to rely on a pension on its own, and any state pension is unlikely to meet the cost of living.

 

Pensions, fortunately, can be moved. Some allow you to dip in and take lump sums out to invest elsewhere. Many people make the mistake of doing this to cover the cost of holidays and other purchases that offer no returns. This can make you poorer overall, so be sure you are fully informed of the consequences.

 

Lifestyle

Your lifestyle now could make a huge difference to the one you enjoy when you are ready to retire. Now the retirement age has become a thing of the past, you can choose when you want to quit working. Of course, it might all depend on if you can afford it! How you live now will help determine that.

 

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Living frugally now will free up more of your income to go into your future investments. You might put a percentage of your income into your high interest savings account. If you want to calculate how much you should put in, why not divide the limit of the account by twelve and aim for that figure? If you have anything else left, you can decide where to invest it.

 

Don’t buy luxury items if you can help it. Buying only what you need allows you to squirrel the rest away into investments. Keep an eye on where your cash is going, and seek financial advice regularly to ensure you are making the best choices. It’s not easy to spend a lifetime without indulgences. But when you reach your preferred retirement age, you can reap the rewards and live your life to the full.