This so-called “home country bias” starts from the moment most of us begin to invest. When I bought my first mutual fund more than 15 years ago, I naturally gravitated toward a fund that was as Canadian as a Guess Who album. Homegrown stocks seemed safer—I just wasn’t ready for the exotic allure of Brazilian oil stocks or Indian carmakers.

But now, with the Canadian dollar so strong, I’ve noticed that more investors are interested in loading up on American stocks. Which raises the question: Just how much of your portfolio should be in foreign equities anyway?

It turns out, there’s no easy answer. We spoke to two financial experts, and each gave surprisingly different advice. So I’ve decided to let them fight it out, and I’ll call the winner after we’ve heard their arguments.

In one corner of the ring, we have David Baskin, president of Baskin Financial Services in Toronto. He says he typically puts a whopping 85% of his clients’ equity money into Canadian companies. He knows he’s putting all his eggs into one geographical basket, but insists there are three good reasons to invest almost all of your money at home.

The first is foreign exchange risk. Baskin says investors who plan to spend their retirement income in Canadian dollars should hold their assets in the same currency. “Otherwise you open yourself up to the tragedy that befell so many Canadians when our dollar took off.” In 2009, while U.S. stocks made huge gains, the plunging American dollar trimmed some 15% from the returns of Canadians holding those stocks.

The second is the better tax treatment you get with Canadian companies. If you’re investing outside a registered account, dividends from Canadian stocks are eligible for a significant tax credit. On an income portfolio yielding 4.5%, Baskin says the higher taxes on U.S. dividends can knock about 1.25% off your returns. “That might not sound like much, but 1.25% per year, compounded, is huge.”

Baskin’s last reason is geopolitical risk. Markets in Western Europe and Japan are no riskier than those in North America, but emerging markets are a different matter. Dubious regimes in countries such as Venezuela—which has expropriated foreign assets in the past—could put your capital in peril.

In the opposite corner of the ring is Brad Steiman, a director at Dimensional Fund Advisors in Vancouver. He says that hav­ing a properly diversified account trumps Baskin’s concerns, and by overweighting Canada, you are inadvertently overweighting certain industries. That’s because almost 80% of the S&P/TSX Composite Index is made up of just three sectors: financials, energy and materials. By investing only in the TSX, you have very little exposure to technology, consumer staples and health care. The U.S. market is more diversified, with seven economic sectors each comprising 10% to 20% of the S&P 500 index.

That’s one of the reasons why Steiman says Canadians may want to put just 20% to 40% of their equity holdings in domestic stocks, and the rest in foreign equities. “Your currency allocation and your asset allocation should be separate decisions,” he says, adding that hedging can help with currency risk.

So who’s right? Both sides of this debate make good points. The average Canadian’s portfolio is subject to a strong home bias that’s not always rational. But you can’t blame people for sticking close to home. It’s easier to put your money into companies you know, plus currency risk and the dividend tax credit are real factors.

To solve the dilemma, I suggest a compromise. If you’re an index investor using ETFs, I recommend going for true global diversification in the equity portion of your portfolio with 1/3 Canadian, 1/3 U.S. and 1/3 international stocks, the allocation for our Global Couch Potato portfolio. With ETFs, there’s no need to monitor individual stocks. Plus, currency hedging is often already built in.

If you pick your own stocks, however, we suggest something close to 50% domestic equities and 50% foreign. That’s because currency hedging is impractical for you, and it’s more important that you know the companies you invest in. Dividend investors should go even heavier on homegrown stocks, so you don’t miss out on the dividend tax credit for Canadian companies.

By the way, a good way to get some diversification if you’re a stock picker is to focus on international companies based in the U.S. Global giants such as Wal-Mart, Coke and IBM are easy to research, and they offer international diversification, as they are exposed to economies all over the world.

After all, it’s good to wave the flag. But when it comes to your investment portfolio, waving a few flags turns out to be the smartest strategy of all.

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Readers do a lot of the legwork on this website, posting bargains, sales and coupons they’ve stumbled upon. Check out the warehouse sales section, where you’ll learn about the latest manufacturer sale events and store closing sales.

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.

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.

Plotting these numbers on a chart (see image, below) will warn you of market turmoil ahead, says Jim Otar, founder of RetirementOptimizer.com. If the line showing the five-month average (in black) drops below the 12-month average (in pink) when it’s declining, there’s a chance the stock market is about to plunge. Move your investments to safer territory, Otar advises. When the black line goes back above the pink line, the worst is likely over. It’s okay to invest in stocks once more.

This method, which Otar uses to predict major shifts in the market, has proven remarkably accurate. An investor who used it to track the S&P 500 Large Cap Index would have been warned  well in advance of both the 2001 and 2008 market crashes.

He would also have been able to get back in for the recovery. Calculating moving averages isn’t hard. For the five-month average, add up the preceding five month-end index closing  values and divide by five. For the 12-month average, add up the preceding 12 month-end index values and divide by 12. Some online brokerages even have tools that chart the averages for you.

Despite his relative youth, Bahler is already making big sacrifices to ensure he has enough money saved to cover his golden years. He and his wife scrimped and saved so they could pay off the mortgage on their first home in just six years. To save money, Bahler used to cut his neighbour’s grass in exchange for free haircuts, and his family doesn’t have cable TV. To make sure he’ll have enough to retire on, Bahler has tried to teach himself the ins and outs of investing. He’s partial to GICs because he likes the security, although he knows the return on investment is low.

Some might say he’s worrying too much, but Bahler would counter that people in prior generations didn’t have to worry about retirement the way he does. Things have changed a lot since the 1970s, when big companies such as Bell, General Motors and Stelco offered their workers the best gold-plated defined benefit pensions North America has ever seen. Today’s workers will live longer and thus have to fund longer retirements, but most of them don’t have a pension plan at all. If they do, it’s a defined contribution plan, which can be little more than a fancy group RRSP. If the markets do well, you’ll be okay, but if not, you’re out of luck.

The Cadillac of pension plans, the defined benefit plan, is fading fast. Thirty years ago, 31% of workers in the private sector were enrolled in defined benefit pension plans. Now, only 16% of workers in the private sector have them and that percentage is getting smaller every year. If you’re just starting out in the private sector today, you probably shouldn’t expect to ever get one. And the younger you are, the less chance you have of ever collecting a pension, says Harry Arthurs, the former dean of Osgoode Hall Law School and president of York University, who headed up an Ontario government commission on pensions last year. “If you’re 30 or 40 now, it’ll be pretty slim.”

Already, 74% of workers in the private sector are responsible for funding their retirement on their own. There hasn’t been a huge outcry about the loss of the pension plan, but that’s largely because younger Canadians have no idea what they’re losing. Surveys find that most believe they’ll be just fine in retirement without a pension. They seem to think that they can cobble together enough in their own RRSPs to live as well as their parents are now living in retirement. But many are being too optimistic. The defined pension plans their parents received are typically worth much more than most people realize — often between $500,000 and $1 million each. Most Canadians without a pension won’t be able to save up anywhere close to that much in their RRSPs. Unless there’s a drastic overhaul in the pension system, it means that younger Canadians will struggle harder and harder to save enough — and even then, many will fall short.

When the stock market collapsed in the fall of 2008, it didn’t just hurt individual investors. Pension plans were decimated too. Many plans were underfunded even in those heady days before the crash, and now they’re in serious danger. Even big, supposedly safe Canadian stalwarts now have defined benefit pension shortfalls not in the millions, but in the billions of dollars. Bombardier’s pension is now underfunded by $1.6 billion, or 30%. Manulife Financial’s pension is underfunded by $1 billion, or 28%. BCE’s pension is underfunded by $2.1 billion, Imperial Oil’s pension is underfunded by $824 million, and the Canadian Oil Sands Trust pension is underfunded by $215 million, or 43%. Watson Wyatt Worldwide, a pension consulting firm, estimates the average company pension plan in Canada is now 20% underfunded. In total, the solvency deficit is $50 billion.

This shortfall couldn’t come at a worse time. The first wave of the baby boom generation is hitting retirement age. Many companies are now trying to meet their growing pension obligations while struggling to remain profitable through the recession. In cases where companies have filed for protection from creditors, such as Nortel, employees and pensioners are lumped in with the other creditors to try to collect the money they were promised. Most will be lucky if they get 70% of what they’re owed.

Meanwhile, the changing demographics of the Canadian workforce are taking their toll. Big pensions are falling apart as workforces are slashed and the number of pensioners balloons. When General Motors first started offering pensions it had a workforce in the tens of thousands in Canada, and hardly a soul collecting benefits. Just before it went into bankruptcy protection in 2009, GM had only one active employee paying in to the plan for every three retirees collecting. When you factor in rapidly disappearing union jobs, an aging workforce and retirements that have stretched out from five or 10 years to 25 or 30 years, it’s not surprising that many large companies are thinking about getting out of the pension business altogether. “As the population ages and the number of retirees increases, the defined benefit plan is becoming the tail that wags the dog,” says James Pierlot, a lawyer and expert on pensions with Towers Perrin in Toronto. “Many employers are saying that in the current regulatory environment, they simply can’t afford to take on all the risk associated with funding these plans.”

If pension plans do disappear, theoretically there’s nothing to worry about, because back in late 1950s the federal government came up with a solution: the RRSP. Registered Retirement Savings Plans were supposed be the easy, tax-free way for Canadians to accumulate a tidy retirement nest egg over their working lives. All you had to do was take a bit of your paycheque and invest. By the time you reached 65, your investments would have grown enough to provide a comfortable retirement.

RRSPs proved to be very popular, but in a lot of ways they haven’t accomplished what they were supposed to. The problem is, without the forced saving required by a pension plan, a typical Canadian couple doesn’t save nearly enough. The median household with the main breadwinner between 55 and 64 has only $55,000 in RRSPs, according to Statistics Canada, but to enjoy an adequate retirement, most couples need 10 times that amount. According to Planning for Retirement: Are Canadians Saving Enough?, a study by the University of Waterloo for the Canadian Institute of Actuaries, most people would have to save between 14% and 20% of each paycheque to pay for a decent retirement lifestyle. The study found that a single person earning $40,000 who started saving for retirement at age 40 would need to put away between 14% and 20% of his or her income for the next 25 years. A couple earning $80,000 combined would need to save 18%.

You only have to look at growing gap between public sector workers, who still have defined benefit pensions, and private sector workers, to see what a poor job RRSPs are doing at filling the void. Recently, James Pierlot at Towers Perrin did just that by comparing two fictitious couples. The members of the first couple, Angie and Brad, are both civil servants. The members of the second couple, Courtney and David, work in the private sector. Throughout their working lives, both of the couples are relatively equal. Everyone starts working at age 28, and when they hit retirement, each person earns $50,000 a year. But while their pre-retirement lives are similar, in their post-retirement lives a shocking split emerges. The civil servants Angie and Brad will retire in luxury, with combined pensions worth $1.1 million. Courtney and Dave, meanwhile, will retire with savings worth just $244,800, the amount the average household in Canada has amassed in RRSPs and pensions. So while Angie and Brad will retire at age 58 and enjoy an annual pension income of more than $50,000, Courtney and David will have to work until both are 62. And even then they’ll only get an income of $11,000 a year. The example highlights a gross inequality, but Pierlot says he doesn’t have a problem with public sector workers getting a good pension. “It’s that the rest of the population deserves a better pensions than they’re now getting.”

Alisa Metcalfe-Haggert is a 43-year-old single mom who works out of her home in Toronto as a psychometrist. Like Calvin Bahler in Saskatchewan, she worries a lot about retirement, even though it’s still decades away. She’s well educated, with two degrees in clinical developmental psychology, and she does assessments on children who’ve had head injuries. At one time a hospital might have employed Metcalfe-Haggert full time for her services, but a lot of psychology support jobs have been phased out at medical institutions. Most psychometrists now work privately.

She enjoys her work, but since she’s self-employed it doesn’t come with many benefits. She often thinks about how things have changed since her father, a university professor, was in his peak earning years. Back then, if you worked in the medical field—or a university for that matter—you didn’t have to worry about the future. You just knew you’d be taken care of. But Metcalfe-Haggert is on her own. “Unless I win the lottery, I know I’m the only person who’s going to take care of my retirement.”

Metcalfe-Haggert is typical of the modern Canadian. She’s single, she works for herself, and she’s having trouble coping with the responsibility of saving up hundreds of thousands of dollars so she can retire with dignity. She has been extraordinarily disciplined, socking money away every month since she was 24. But she wishes there was an easier way. What would really help is an optional national pension plan that offers many of the benefits of the public sector pensions, but is open to self-employed Canadians and others who can’t get a pension through work.

In fact, that’s exactly what a growing chorus of pension experts and politicians in Ottawa are calling for right now. The pension commission headed up by Harry Arthurs in Ontario and the pension commission for Alberta and B.C. have both recommended setting up a government system that’s available to everyone, including the self-employed. In Alberta and B.C.’s case, the pension would operate as a defined contribution plan in which employers and employees both contribute. It would be overseen by a pension board and operated by the same kind of experienced pension managers who oversee large public plans now. That’s important, says Arthurs, because most people “don’t have the financial skills” to manage hundreds of thousands of dollars on their own.

Another option is to increase the amount Canadians receive through the Canada Pension Plan (CPP). Right now contributors receive about 25% of their average annual lifetime earnings, according to Monica Townson, a research associate for the Canadian Centre for Policy Alternatives in Toronto. She says it should be topped up to 50% of earnings. That would result in more money being taken from paycheques, but Townson says the increase could be phased in gradually, and most people wouldn’t mind since a larger CPP pension would be government-guaranteed.

Another plan floating around is from Keith Ambachtsheer, director of the Rotman International Centre for Pension Management at the University of Toronto. He is proposing a national supplementary pension to top up CPP and Old Age Security (OAS) payments with an income replacement target of 60% for middle-income workers. Ambachtsheer is largely aiming to help middle-class workers. He points out that government pension programs like OAS and the Guaranteed Income Supplement (GIS) do a good job taking care of the poor, while the rich thrive nicely in retirement without help. It’s the middle-class that has been left out.

So far there has been a lot more talk than action, but insiders involved in government discussions say that the chances of either a larger CPP payout or some form of supplementary pension are quite good. The finance ministers in both the federal and provincial governments are meeting in Whitehorse in December to come up with a beefed-up national pension system, and if they don’t, Alberta and B.C. have indicated that they’ll do it on their own.

The companies offering pensions, for their part, seem to agree that they need the help. A recent poll of 370 Canadian plan sponsors by RBC Dexia found that 89% are pessimistic about the pension system’s ability to deliver in the future. Among their biggest concerns is the ability of their own plans to generate the returns they need to meet their obligations to retirees.

If more companies drop their pensions or switch to the watered-down defined contribution variety, the push for a government-run program will only grow. And much like universal medicare in the 1960s, which was introduced by Saskatchewan before going national, if one province launches a pension system, it won’t be long before others fall into line, speculates Townson. If that happens, a good pension, just like decent health care, will become a right for everyone. Not just the lucky few.

I’m usually sent a book a week in the mail, but lately I’ve been inundated and I’m starting to fall behind. I’ll recommend a few of the books I like next week, but for now I’ll mention the first one that caught my eye: Earn, Spend, Save: The Savvy Guide to a Richer, Smarter, Debt-free Life (Wiley). The book is from Chatelaine and written by the magazine’s financial columnist, Kira Vermond. Naturally, it’s aimed at women.

Normally, I’m suspicious of personal finance books for women. The principles of saving and investing are no different for men than women. So why buy a female-focused book when there are plenty of classics already out there? (The Wealthy Barber, The Millionaire Next Door and The Four Pillars of Investing, to name a couple.)

Plus, I’ve not been impressed with a lot of these books so far. They seem to approach the topic of money as if the readers were in an episode of Sex in the City. (“Hellooo! Do you really need another Prada purse. Those RRSPs aren’t going to take care of themselves, sister.”)

Earn, Spend, Save is a vast improvement on what’s already out there. The advice is easy to digest but doesn’t sacrifice solid information for style. This book seems to be targeted to younger women just starting to build their careers. In that respect, it provides a nice overview of investing, debt, credit scores, taxes, RRSPs and mortgages. Reading it won’t steer you on a path to riches, but it will provide a solid foundation of personal finance know-how.

Now, back to all those other books I have to read. Stay tuned…

Keister can reel off a long list of reasons why some people get rich and others don’t: education, inheritance, entrepreneurial savvy. But a few years ago, she began paying closer attention to a cause that she had once dismissed as far-fetched: religion. “I’d mention it at conferences and economists would laugh,” she says. “But when I’d ask people who are religious whether their faith affects how they handle money, they’d say ‘silly academic, of course.’ ”

For those who haven’t dusted off their King James Bible in a while, it may come as a surprise, but religion and money go hand in hand. Scripture refers to money and finance over 2,000 times. Prayer only gets 500 mentions. Now researchers are discovering that religious people are better savers. And because they’re less likely to take chances on risky investments, they may do better in the stock market too.

Believing in a god on its own isn’t enough to make you a wise money manager. But the values of religious people do affect their approach to money, says Luc Renneboog, a professor of finance at Tilburg University in the Netherlands.

In a study last year, Renneboog found that Protestants are more likely to own stocks than Catholics. The reason: Protestants tend to believe that individuals are responsible for their own success or failure. Catholics, meanwhile, place more importance on the security of their families. So they’re more likely to buy a house than stocks, and leave money for their kids.
Similarly, Keister found vast differences in wealth in the U.S. between Jews and evangelical Christians (conservative Protestants). Growing  up Jewish you’ll learn the importance of investing in stocks at a young age, says Keister. Conservative Protestants on the other hand, shun investing, marry young and put off buying a home.

The result: only 1% of Jews in the U.S. have no bank account, no stocks and don’t own a home. Fifteen per cent of conservative Protestants fit that description. “Conservative Protestants think ‘God will take care of me.’ So for them the church is a good investment—stocks not so much,” Keister says.

There’s no hard evidence that religious folks are more likely to make a killing in the markets yet. But some have noted that because they are more interested in spiritual than material gain, they may be less susceptible to the greed and fear that can lead investors astray.

Certainly George Athanassakos, who teaches value investing at the University of Western Ontario, has noticed that successful value investors tend to act in religious ways. “When I ask them what’s the biggest lesson they’ve learned in life they always respond by saying ‘humility and integrity,’” he says. “This is the foundation of every religion. So even if such investors aren’t religious, they sure behave as if they are.”