RRSPs: A plan for all seasons: Canadian Business’ editor Steve Maich, and senior writer Matt McClearn, created a compelling story on our lack of savings and love affair with debt. With only 24% of Canadians investing in an RRSP, a retirement crisis is looming. Here’s a bit of what they wrote:

“Here’s what most big-bank economists believe but hesitate to say: Canada is on the front edge of a retirement crisis. And while it’s true that some people just don’t want to retire, a far greater number appear simply to be giving up on the dream while they are still mid-career. Others are just deluding themselves that it’ll all work out, somehow. If that doesn’t sound like such a big deal to you, it should. Retirement isn’t just about old folks hitting the road in an RV or relaxing in Florida for the winter months. The financial stability of the retirement cohort is a fundamental pillar of any developed economy, and if that pillar is crumbling, it means future generations of elderly Canadians will be even more dependent on government support, even more hobbled by debt, and even more vulnerable to the kinds of economic swoons that we saw last year.”

Check out part one and part two.

When will the markets get their groove back: The title is pretty self-explanatory — the markets aren’t doing anything spectacular these days. The Financial Post’s Janet Whitman attempts to explain what’s going on, and what it will take before we see the numbers rise. Whitman writes:

“Mr. Dwyer said the market is in a transitional phase. While the housing market has stabilized and Americans’ retirement plans have recovered, consumers still have plenty of concern about the labour market. ‘Until we see some positive numbers in the jobs market, that’s going to keep spooking the market.’”

Tim Hortons Brews an Expensive DRIP and SPP: This cleverly titled blog post from Canadian Capitalist looks at Tim Horton’s new dividend reinvestment (DRIP) and  share purchase plan (SPP) programs. While the company says these are economical ways to invest, CC doesn’t think so.

“Tim Hortons said that the Plan allows shareholders to purchase shares in ‘an economical and convenient way’. The Tim Hortons DRIP and SPP may be a convenient way to accumulate shares but it is a joke to call it economical.”

Three ways to find value in a pricey market: While the market isn’t moving around too much right now, it’s still higher than it was a year ago. So finding good value can be challenging in some cases. CNN Money’s Carla Fried shares her advice on how to find bargains in the market. She offers up some good suggestions including finding income producing stocks and equities that are on the rise. One of her good value bets? Tech stocks:

“The bargain: Tech stocks. Yes, tech was among the market’s big winners in the recent rebound. But because earnings for information technology companies actually grew during the financial crisis, tech has seen its price/earnings ratio fall since the credit crunch began in 2007, while the S&P 500′s P/E has risen.”

On Twitter:

Kerry Taylor (@squawkfox), author of 397 Ways To Save Money, is a great read. She often posts insightful personal finance links and re-tweets great content from other financial personalities.

Follow Bryan on Twitter @_inthemoney

What is an RRSP?

Of course you know what an RRSP is—it’s that thing you’re putting money into to save for retirement, right? Beyond that, many people’s understanding of RRSPs is pretty fuzzy. A common misconception is that the RRSP is a type of investment like a mutual fund, but it’s not. It’s simply a saving or investing account with certain tax-saving characteristics. When your bank sells you an RRSP, all they’re selling you is a prepackaged investment—usually a collection of mutual funds or a wrap program—that happens to be in an RRSP or registered account. But you can also open an empty RRSP account at your bank or discount brokerage and put whatever investments you want in it. You can even hold several different RRSP accounts with different institutions. “It’s really a personal pension plan,” says Peter Volpé, senior vice-president of the Toronto wealth management firm Integra. “For those of us who don’t have a pension plan to fall back on, it’s our best opportunity to build our own pension.”

How much can I contribute to my RRSP this year

Up to 18% of your income to a maximum of $21,000 for the 2009 tax year. For 2010, the maximum will be $22,000. But if you didn’t max out your contributions in previous years (and most people didn’t) you can probably put in much more. Check the notice of assessment form the government sent you after processing last year’s tax return. The amount you can contribute will appear on the form.

When is the contribution deadline?
March 1, 2010 is the deadline for contributing to an RRSP for the 2009 tax year.

What kind of investments should I hold in my RRSP?

“All the general principles of portfolio-building apply,” says Eric Kirzner, professor of finance at Toronto’s Rotman School of Management. “You still want to have a proper balance of safety, income and growth.”

A good place to start is a portfolio of mutual funds that delivers a 60/40 split between stocks and bonds. Exchange-traded funds (ETFs) that give you the same split are a better bet, as their low fees mean they have a greater potential for growth.

If you have enough money to build both a registered and non-registered portfolio, then investments such as bonds, GICs and high-interest savings accounts are best kept inside of an RRSP, because their interest income is taxed at a higher rate. Capital gains and dividends are taxed at a lower rate, so stocks can go outside your RRSP.

Should I change my RRSP investments as I get older?

Yes. As a general rule, the closer you are to retirement, the safer your portfolio should be. When you’re in your 20s, 30s and 40s, it’s fine to have up to 60% of your money in equities, because if the stock market tanks, there’s time to recover. But in your 50s and 60s, one bad year in the market can do serious harm.

One useful rule is to subtract your age from 100 and invest no more than that amount in stocks. So if you’re 40, you can put 60% of your portfolio in stocks, but if you’re 60, you should have no more than 40% in stocks. There are several life-cycle funds on the market that will automatically do this for you.

Tina Di Vito, director of retirement strategies at BMO, also suggests that as you get closer to retirement you start building up a buffer. How much? Just calculate what annual retirement income you’ll need and multiply it by three. If you think you’ll need to withdraw $20,000 a year, then in the years before you retire, build up a $60,000 buffer in ultra-safe investments, such as money market funds or GICs.

Is the money in my RRSP really tax-free?

No, the government will get its pound of flesh later. This is how it works: Say you put $5,000 in an RRSP this year. You’ll get a tax deduction on that money, so you effectively are delaying paying income tax. But when you take that money out of the RRSP—whether it’s during retirement, or any other time—you will be taxed on that income just like you’re taxed on any other income you earn.

The way to get the most out of RRSPs is to put money in when you’re in a higher tax bracket—when you’re working full time and earning at least $40,000—and take it out in retirement, when you have less income and you’re in a lower tax bracket. This way you pay less tax in total to the government.

The other main benefit of RRSPs is that investments grow inside the plan tax-free. This means you don’t have to pay capital gains when you sell stocks and you don’t have to pay tax when you receive interest and dividends. When you take money out of your RRSP, it’s taxed as if it was income earned that year.

How much should I contribute to my RRSP this year?

There’s no hard and fast rule. The goal for most people is to contribute enough so that when you retire, you can maintain the same lifestyle you enjoyed while you were working.

The maximum you can contribute each year is 18% of your income, and if you’re managing that, you’re good. Each year, roughly two thirds of Canadians contribute nothing at all. We find that contributing about 12% of your pre-tax income each year should be fine for most people, as long as you contribute regularly, invest wisely and don’t take on a massive mortgage or large amounts of other debt.

I maxed out my 2009 RRSP contributions. Can I add money to my RRSP in January and February, and count it as 2010 contributions?

Yes, contributions made in the first two months of the year can be declared for either tax year. If you don’t want the contribution included on your 2009 tax return, just wait and include the amount you deposited on your tax return for 2010.

I have a pension. Do I need an RRSP too?

For most people the answer is yes—although if you have a good pension at work, you can certainly contribute less to your RRSP than someone without one. With no pension, you can contribute up to 18% of your income to an RRSP each year. If you have a private pension, then the amount you are allowed to contribute to your RRSP will be reduced, to reflect the fact that you are also contributing to your retirement income through your pension at work.
There is one group that doesn’t need RRSPs at all: government workers. Teachers, police officers and other civil servants have among the best pension plans available and won’t need help from RRSPs to retire comfortably. For instance, a couple who are both government workers can expect to enjoy a combined annual pension income of at least $50,000, which is roughly the kind of income that a million-dollar portfolio would generate.

Are income trusts a good choice for my RRSP?

A decade ago most investors had never heard of income trusts. Around six years ago they suddenly became a hot investment, especially for retirees looking for a steady source of income. That’s because their unique tax structure allowed for juicy yields of 8% to 12%.

Then, in October 2006, the government suddenly announced that income trusts would be taxed. Their value plunged overnight, and millions of retirees watched their retirement savings get decimated. Since then, income trusts haven’t been popular, but they may be worth another look. The income trust tax kicks in on January 1, 2011, but their  share price has already been discounted to take that into account—and some trusts are still yielding 7%.

If you decide to include income trusts in your retirement portfolio, Dan Hallett, director of asset management at HighView Asset Management in Oakville, Ont., suggests that you keep them outside your RRSP. That way you can apply the dividend tax credit to the income they provide. If income trusts are held inside your RRSP, the income you get is taxed at the regular income tax rate when it is withdrawn.

What happens to my RRSP when I retire?

You can leave your investments inside your RRSP until you’re 71, regardless of whether you’re working or not. But at age 71, you have to wind up your RRSP and start taking the money out. If you took all the money out at once and claimed it as income, you’d get a massive tax bill that year, so most people transfer their assets into a Registered Retirement Income Fund, or RRIF, so they can convert them into a regular monthly retirement income.

You don’t have to liquidate your investments to convert your RRSP to an RRIF. You just sign a document and change the name of the account. What really changes is the rules: You can’t put any more money in, and you are forced to start taking money out. Your financial institution will send you a notice telling you the minimum amount you need to take out each year. Typically, at age 71 you have to take out around 7%, and that amount gradually increases to 20% by age 94.

Most people decide to change the composition of their investments when they retire, as income and safety are now priorities, rather than growth. This can mean adding an annuity, which guarantees a set monthly payment for a set period of time (often for life). Unfortunately, rates are very low right now, so annuities aren’t a great buy. Other options include bonds, dividend-paying stocks and even income trusts.

Which should I contribute to first: my mortgage or my RRSP?

Financial planners have debated it for years, but from a pure dollars-and-cents perspective the correct answer is usually to pay your mortgage down first. Every time you make an extra mortgage payment you reduce the amount owed on the principal. If your mortgage interest rate is 5%, paying it off faster is like getting a guaranteed 5% return. Yes, you can get a better return than that in the stock market (if you’re lucky), but it’s not guaranteed. So unless you can find GICs that pay 5%, you may want to attack the mortgage first.

What’s the best way to invest in my RRSP: Should I buy stocks, mutual funds or ETFs?

It all comes down to what kind of investor you are. If you are disciplined, informed and willing to put in the time, you can do very well by buying individual stocks. However, you need to stick to a proven strategy, such as value investing, and you should buy for the long run. Studies show that most stock pickers trade too often, and can get sucked into hot sectors, so they’re always buying high and selling low.

Mutual funds are the most popular way to invest for retirement, and they are a good choice if you’re just starting out. But you should stick to an asset allocation that works for you, and keep your fees low.

Investing in index funds or exchange-traded funds (ETFs) is a great way to invest for both beginners and the more experienced. Our Couch Potato Portfolio of ETFs can give you many of the benefits of mutual funds at a much lower cost, which means a higher return over the long run.

My RRSP returns are abysmal. Why am I bothering to invest in them?

Ah, we feel your pain. We really do. For most investors the last 18 months have been a complete write-off. But retirement planning needs to be measured in decades, not months. The key is to stay invested and to keep making contributions right through the market lows. To understand the long view, take someone who just turned 65 who started working in 1970. Had he invested $10,000 in the equivalent of the S&P/TSX Composite index back then, it would now be worth about $400,000. Last we heard, you can’t get those kinds of returns by stuffing your money under a mattress.

Should I get a spousal RRSP?

Spousal RRSPs can save couples a lot of money, although they are less important than they used to be. The idea is to equalize the incomes of the spouses as much as possible to reduce your tax bill. It works because you pay far more tax on a single $100,000 income than you do on two $50,000 incomes.

The best way to use them is for the higher earning spouse to contribute to a spousal RRSP in his or her partner’s name. These contributions will use up some of that person’s contribution room, but when the RRSPs are wound up, you’ll have two smaller incomes instead of one big income so you’ll save on taxes.

Still, spousal RRSPs are less popular than they used to be. That’s because recent changes allow couples over 65 to split their income from RRIFs, annuities and pensions for tax purposes.

Can I take money out of my RRSP without a penalty?

Yes, if you’re using it to buy your first home or head back to school. Under the federal Home Buyers Plan, you can withdraw up to $25,000 from RRSPs without paying tax. The catch is you have to repay the full amount within 15 years. You can also withdraw $20,000 from your RRSPs tax-free to finance your education, though no more than $10,000 in one year. Once again, the money has to be repaid.

Outside of those programs, if you try to withdraw money from your RRSP you’ll usually be hit with a steep withholding tax—as much as 30% of the money you withdraw. That penalty will eventually be refunded if your income is low enough though.

I’m taking a year off work without pay. Is that a good time to withdraw funds from my RRSP?

When your income is low, you pay less tax on your RRSP withdrawals, so it can be an excellent time to shovel money out—as long as you trust yourself to put it right into a TFSA and continue saving. You’ll initially be hit with a substantial withholding tax, but if your total income for the year—including your RRSP withdrawal—is less that $10,000, when you file your return the tax is refunded.

How much should I have in my RRSP for my age?

It depends on how luxurious a retirement you want. To get a rough idea, start by adding up how much annual income you think you’ll need in retirement; then subtract the amount of money you expect to get from your company pension, Canada Pension Plan and Old Age Security. Then multiply that amount by 30. That’s how much you need to have saved by the time you retire, says Jim Otar, founder of RetirementOptimizer.com.

Here’s an example: You and your spouse are together earning $100,000 a year. Most retirees can live comfortably on half their pre-retirement income. That’s $50,000. Many couples in that situation will get about $33,500 a year in retirement income from the Canada Pension Plan, workplace pensions and Old Age Security, so you’ll need an additional $16,500 a year from your own savings. Multiply that by 30 and you get close to $500,000. That’s the amount you need to have banked by the time you retire.

How do you know whether you’re on track to reach your goal? The chart above offers some sample numbers, based on a few realistic assumptions. The first is that in the early years of your career, RRSPs won’t be a priority. If you’re in your 20s, you’re probably too busy going to school and getting your career started to contribute. Any extra money you do earn should go towards paying down debts. By your early 30s, the mortgage, cars and kids are weighing you down. It’s okay to skip RRSP contributions during these years too, says Malcolm Hamilton, an actuary with Mercer, a human resources and consulting group—as long as you don’t make the mistake of overspending and digging yourself deep into debt.

Once you’re in your mid-30s, it’s time to start attacking those RRSPs. To reach the $500,000 goal (in today’s dollar), you and your spouse would have to start putting $10,500 a year into your RRSPs at age 35. These calculations are based on a 5% annual return and yearly contributions that rise 2% annually to keep pace with inflation. Don’t fret if this timetable sounds ambitious. Even if you can’t come up with $10,500 every year in your 30s, you’ll probably be able to catch up in your 50s with larger contributions. By then, your mortgage should be paid off and the kids finished university. That’s when you need to get really serious about putting money into RRSPs if you want to make that $500,000 target.

AGE    VALUE OF RRSP
25    $0
35    $0
45    $121,500
55    $283,500
65    $500,000

Should I use  an RRSP or a TFSA?

Confused by another set of letters? Don’t be. TFSAs, or Tax-Free Savings Accounts, are simply one more way to shelter your money from the taxman. The difference is that with RRSPs, you get a tax break when you contribute. When the money’s withdrawn, you’re taxed. For TFSAs, the process reverses. There’s no tax break up front, but the government can’t get its paws on your money when the funds are withdrawn.
So which is better? It all depends on how much money you make. Canadians earning less than $36,000 should use TFSAs, says Gordon Pape, author of The Ultimate TFSA Guide. The reason is that people with lower incomes can make more in retirement than they do when they are working, due to the government benefits you get at age 65. You always want to pay income taxes when your income is lower, so if you make less than $36,000 it’s better if the money is taxed before you put it in your retirement savings, as is the case with a TFSA. Plus, when you retire, the money you take from TFSAs isn’t considered income, so it won’t result in clawbacks to Old Age Security and the Guaranteed Income Supplement.

The same isn’t true for RRSPs.

If you’re just starting your career and earning in the $30,000 range, you could start with TFSAs and when your income goes up, you could switch to RRSPs. Not only will you get larger tax breaks, but you’ll have built up lots of extra RRSP contribution room from the years you were using a TFSA instead.

What is the most tax efficient way to get money out of RRSPs?

If you thought saving up for your retirement was tricky, wait until you quit working and start spending some of that money.

The trouble often starts when people turn 65. If they have a good pension and other investments to draw from, they don’t dip into their RRSPs at all at first. But when they turn 71, the government forces them to start withdrawals, and because their income is so high, more than 40% of that money could go to the taxman.

One way to avoid this problem is to look at ways to keep your income from ballooning when you hit 71. If you’re not going to need much money from RRSPs until your 70s, you may want to consider retiring earlier than you planned and taking money out of your RRSPs early so it’ll get taxed at a lower rate.

You can also try a few tax-saving manoeuvres. For instance, in the years just before you retire, don’t claim the tax deduction on your RRSP contributions. You can defer those deductions to later years when your income is higher and you really need them, says Tim Cestnick, author of 101 Tax Secrets for Canadians.

Another option is to buy flow-through shares issued by certain mining and oil exploration companies. The tax credit you get from investing in these firms can be high enough to offset the taxes you have to pay on RRSP withdrawals.

Find more answers to your RRSP questions.

How to maximize your contribution is never an easy answer, and with the pressure on you may be tempted to throw your cash into anything the bank, or your adviser, suggests. But that’s not a good idea. If you haven’t done your research yet, there’s still a little time. I’ve compiled a list of some of good RRSP advice on the web.

Naturally, I’ll start with MoneySense. We’ve had a lot to say on this topic over the years  — just search RRSP and stories will come up. But it’s a good idea to take a look at our recent RRSP Q&A, where three adviser’s answered a whole bunch of questions on where you should put your money. Read up on the Coach Potato Portfolio too; it’s an ideal way to save up those retirement funds.

The Financial Post also has a ton of RRSP information. Its RRSP Centre has stories on the markets, TFSAs, unlocking your pension plan and a more.

If you’re getting into the market for the first time, take a look at some of the bank websites. TD Bank’s RRSP page is a good primer for newbie investors, while BMO has a detailed FAQ. Of course, the bank’s want you to invest with them, but even so, the information is more practical than you might think.

Here’s a story from Advisor.ca about some of things people do wrong when it comes to RRSP planning. One mistake people make? “Monitoring their portfolio too closely,” writes the site’s editor Steven Lamb about a BMO report. “The survey found that 63% thought they should check up on their investments at least once a week, if not daily.”

AOL Money also has an RRSP Centre. It’s not as in depth as some other sites, but it covers everything from using ETFs in your portfolio, why contributing to an RRSP is a must and how to pension-split.

There are plenty of other good RRSP reads out there as well, so look around and get some advice before you make any hasty investment decisions.

So is it time to start investing again? That’s an easy one. The answer is yes, if you haven’t already. But that brings us to a much tougher follow-up: What, exactly, should you be investing in?

The obvious place to start is stocks. They’ve done amazingly well over the past year, so it’s tempting to join the party while stocks are still a bargain. Sadly however, the party may be already over. As Norm Rothery points out in his column on p.21 (“Four deals in a pricey market”), the TSX is already overpriced by some measures.

Stocks were so expensive prior to the crash that the market tumble only briefly brought values back down to earth. The swift recovery since then means that most stocks are once again looking pricey. That doesn’t mean they couldn’t keep going up for a while (especially if we hit another bubble), but it does mean that over the long run, your return on equities may be lower than the historical norm.

Okay, so you missed the chance to make a killing on the stock market. Why not invest in real estate instead? It has gone nowhere but up for more than a decade. Housing is so strong that, apart from a brief faltering just over a year ago, it’s been surging as if the recession never happened.

But there’s a problem here too. If you get into real estate now, you could be buying in right at the peak. Economist David Rosenberg of Gluskin Sheff in Toronto has calculated that Canadian housing values are anywhere between 15% and 35% above what economic fundamentals suggest they’re worth.

Others argue that housing still has lots of life in it yet. But caution is warranted when even Bank of Canada governor Mark Carney is out there saying that Canadians should make sure they don’t get in over their heads, as interest rates will inevitably rise.

Fine. How about gold then? Two years ago gold was trading in the US$800 an ounce range. Now it’s up to US$1,100. It seems to be unstoppable, and besides, gold always does well in recessions.

But like real estate, some say gold’s value has risen way too fast. Nouriel Roubini, the economist known as Dr. Doom for predicting the recent economic crash, argues that the current price of gold isn’t based on fundamentals, rather it’s being driven up by a herd-like mentality among investors. “All bubbles eventually burst,” he wrote recently. “The bigger the bubble, the greater the collapse.”

Maybe it’s time to play it safe then. GICs are always a safe bet. But they may be too safe. The trouble with GICs is they hardly pay any interest right now. Even five-year GICs are only paying a paltry 3% interest these days. Those returns will disappear if, as some experts predict, inflation starts to rise. “A lot can happen in five years and I think it’s a bit risky to lock in at these rates,” says Dan Hallett, director of asset management at HighView Financial Group in Oakville, Ont.

So what about bonds? Last year investors put more money into bond funds than any other category of investments. No wonder. Bonds did remarkably well over the last decade and they’re seen as safer havens than stocks, particularly government bonds.

But dangers lie ahead here as well. Rising interest rates (and they do have to rise eventually) will cause bond prices to fall. Also, if the economy falls back into recession anytime soon, default rates on corporate bonds will go up.

So where should you invest? If all the asset classes are either overvalued or stagnant, where on earth should you turn? The answer, is all of the above.

The last decade has shown that most people can’t anticipate where the growth will come from. Why beat yourself up trying to guess? Stick to the fundamentals of a sound investment strategy with the right mix of stocks, bonds and GICs in a low-fee investment account.

Forget about trying to time the market’s ups and downs. Ditto for guessing whether bonds are going to outperform stocks or vice versa. Even seasoned investors get it wrong. Sticking with a diversified portfolio and contributing regularly is what works over the long run.

Need proof? Look at what happened to most of the people who tried to time the market during the crash. Even the pros were pulling out right at the bottom. The smart investors turned off CNN, ignored the panicky newspaper headlines and kept contributing all the way down—and all the way back up again.

It’s true that right now the markets are sending out a lot of mixed signals. And it’s also true that you may not get the returns you’re used to for a few years. But you’ll still do fine. Just stick to your long term strategy, and you’ll sleep much better—especially when the next hurricane hits.

Twitter is great way to stay on top of personal finance news. If you haven’t used the micro-blogging/social networking service, it’s worth trying out, at the very least to build a giant RSS feed that you can access in one place. You can read and interact with other like-minded users, which may be just as time consuming as flipping through the paper front to back, but it’s a lot more fun. If you want more info on how to use the site, read this Twitter primer.

There’s a lot of great people to follow, so here’s a roundup of who you should be paying attention to.

Jonathan Chevreau (@jonchevreau): The Financial Post’s personal finance columnist has embraced Twitter like no other. He tweets multiple times a day, offering insights into investing and business news and he doesn’t shy away from retweeting information he finds interesting. He also responds to comments, so if you have a question for The Wealthy Boomer blogger, ask away.

Canadian Finance (@canadianfinance): If you’re a finance nut there’s a good chance you’ve read Tom Drake’s Canadian Finance Blog. His twitter account offers links to his blog posts, a bit of social media commentary and even the occasional book giveaway.

Money Energy (@moneyenergy): I don’t know much about the woman behind this account other than her name is Clare, she’s an investor and runs the Money Energy blog. Her posts cover a wide variety of topics, from ETFs to options and Olympic hockey.

BC Business (@bcbusiness): If you’re interested in the West Coast’s business community, BC Business magazine is probably already on your radar. The mag’s Twitter feed, run by the digital editor, posts stories from its site, but also from other magazines and newspapers. It’s not just business either — the Vancouver-based editor’s talking Olympics as well.

Globe Investor (@globeinvestor):  Don’t expect any interaction with the Globe’s twitter feed — it’s links to Globe and Mail stories plain and simple. But there are a lot of them they’re pretty much all worth reading. A good way to keep up on daily business news.

There are lot more good ones to follow, but those were a few to get started. And now for the shameless plug — I started a Twitter account to go along with this blog. I’ll tweet about personal finance and business. Follow me @_inthemoney. You can also follow MoneySense @moneysensemag or Canadian Business @cdnbusinessmag.

Got any other suggestions on who to follow? Let me know in the comments.