To make the right choices, you need to do a bit of planning. There’s no right answer for everyone, and much depends on your priorities and the setbacks you face along the way. Just ask Scott and Erin Parkin of Brantford, Ont. Erin, 33, has been a stay-at-home mom to her two kids, Owen, 10 and Molly, 6, for the past 10 years. Scott, a 39-year-old engineer, has been the sole income earner and since he’s in a high tax bracket, he has always contributed to RRSPs—his own plan plus a spousal RRSP for Erin. Over the years they’ve accumulated $66,800 in Scott’s RRSP and $20,000 in Erin’s.

But those contributions came to an end in 2009. That’s because the Parkins aren’t comfortable with the way their RRSP money is invested. Their entire portfolio is made up of segregated funds with annual fees over 3%, and they don’t know what to do about it. But the bigger reason is that they are trying to stay on track to pay off their $198,000 mortgage in 15 years. “We put the little extra money we have—about $3,600 a year—towards the mortgage,” says Scott.

The couple also say they could probably squeeze an extra $200 a month from their budget to put towards either the RRSP or the mortgage, but they aren’t sure which option is best. These competing priorities are typical for people in their 30s. “It’s a constant battle,” says Scott.

Megan and Matthew Shaw of Thunder Bay, Ont., share the Parkins’ concerns. They too, are trying to raise a family (they have three kids, ages 9, 4 and 2) and pay off their $99,000 mortgage solely on Matthew’s $85,000 salary. (Names have been changed to protect their privacy.) “We have no consumer debt so we’re happy with that,” says Matthew, 35, a police officer for the last six years. “But after expenses we usually have about $5,000 annually to invest, and we don’t know where to put that money—the mortgage or RRSPs?”

What makes the choice more vexing is the fact that the Shaws are at a loss over how to fix the stagnant returns on their $150,000 RRSP nest egg. They feel they need a whole new strategy. “Why are we putting all this money into RRSPs and not getting any returns?” asks Megan, 38. “Our annual fees, which average about 2.8%, are ridiculously high.”

The Shaws feel stuck. Most of their mutual funds have deferred sales charges (DSCs)—a penalty you pay when you sell the fund before a certain number of years. These charges usually go down to zero after seven years, but before then the charges can be steep. “We’re debating whether to bite the bullet, sell the funds and pay the penalty, which could amount to several thousand dollars,” says Matthew. “Or, should we wait and sell them when the deferred sales charges reach zero in a few years? We just don’t know.”

What the experts say

In your 30s—like Scott and Erin Parkin, and Megan and Matthew Shaw—you’ll often feel frustrated at not making much financial progress. The good news is that focusing on paying down a mortgage is an excellent strategy. “It’s the highest-return risk-free investment the average person can make,” says Schlenker, the planner. “Most mortgages allow extra principal payments, up to 10% of the balance, on anniversary dates. Take advantage of that opportunity.”

Still, if saving is a huge motivator for you, it may make just as much sense for you to contribute to an RRSP. “Mortgage vs. RRSP? I get asked that question all the time,” says Lamontagne. “If it’s strictly a financial decision, then typically high-income individuals in the top tax brackets are better to maximize their RRSP room before making additional mortgage payments,” says Lamontagne. “The key is not to spend that refund. If the Parkins contribute the refund back to their RRSPs, or even use it to pay down their mortgage, then they will be compounding their savings.”

Something should also be done with how the couples’ existing RRSPs are invested. The Parkins and the Shaws have their savings tied up in high-fee investments, and the costs of their funds are eroding their returns. “In reality, investors can control only two things that affect the returns on their investment accounts—their own behaviour and the fees they pay,” says Schlenker. “Both the Parkins and the Shaws are paying fees of $3,000 to 4,000 a year, far higher than seems warranted.”

Lamontagne agrees. “If they can lower their costs by even 0.5%, that will leave thousands of dollars more in their accounts by the time retirement rolls around.” The Parkins and Shaws should start shopping around for a fee-based adviser, rather than one who receives commissions from the funds he or she sells. Ideally, their adviser should be using low-cost exchange-traded funds (ETFs) or index mutual funds to build their RRSP portfolios.

In the Shaws’ case, they can begin the transition by transferring at least some of the money out of their mutual funds. You can usually transfer 10% of the balance each year without being hit with the deferred sales charge. A low-fee investment portfolio split 60% equities and 40% fixed income—similar to the MoneySense Couch Potato Portfolio—is a good place to start. (See MoneySense.ca for details.)

Finally, the Shaws need to realize that police officers such as Matthew stand to collect a very generous pension in retirement. That means having a large RRSP would result in that money being taxed heavily when mandatory withdrawals start at age 72. So a better option for the Shaws may be to use extra money to pay down the mortgage and max out their TFSAs before they save more in RRSPs.

For many young people, such as 28-year-old Toronto actor and model Lori Bassarab, their first goal is paying down debt. When Bassarab graduated from the University of Western Ontario and got her first full-time job as a marketing manager, she was focused on paying off more than $10,000 in student loans. “I cut back on concerts, vacationing, food and alcohol consumption until it was entirely paid off,” says Bassarab, who is now debt-free.

Bassarab also made some RRSP contributions in her early 20s. “I was interested in reducing taxes,” says Bassarab. “My parents suggested I do it, and I did.” Right now, she holds a couple of stocks in her RRSP but hasn’t checked up on them or made another contribution for a couple of years. “With my modeling job, entertainment and clothing bills are stupid,” says Bassarab. “Once I pay all my expenses, there’s just nothing left at the end of the year.” Her goal? To eventually use her $15,000 or so in RRSP savings to make a down payment on a small condo. “I wish I managed money better. I worry about saving for retirement, so anything that would help make that easier would be great news.”

Kimberly and Brad DeLenardo, both 28, sympathize with Bassarab. The DeLenardos both work for social service organizations in Kirkland Lake, Ont., but say their financial life has become more complicated since their two young daughters—Adriana, 22 months, and Leyla, two months—were born. And even though the couple earns a respectable $110,000 in total annually, they’re stretched to the limit.

That’s because on top of carrying $20,000 in student debt and a $45,000 mortgage on their home, the couple’s expenses just keep mounting. They include a huge $15,000 annual daycare bill when Kimberly returns to work from maternity leave next fall, a much bigger mortgage when they buy a larger home in a couple of years, as well as the $1,000 a year that they contribute to their kids’ RESPs annually. That leaves only about $2,400 a year for RRSPs. “Neither one of us has a company pension, and we won’t be able to contribute much more than this to our RRSPs for the foreseeable future, so we worry,” says Kimberly.

Right now, Brad has $10,000 in his RRSP while Kimberly has $17,000, mostly in bank mutual funds. “I’ve been too busy to monitor returns or look at the fees we’re paying,” says Kimberly. “It gets pushed aside because life gets in the way. But it’s on our to-do list for this year.”

What the experts say

Don’t worry if you’re not building up a large RRSP during the early years of your career. “Saving for retirement is unlikely to be a top priority in your 20s,” says Norbert Schlenker, president of Libra Investment Management Inc. in Salt Spring Island, B.C. “Instead, do what you can to increase your income, cut your expenses, and start cutting your debt.” Remember that reducing debt and saving for retirement are not competing goals: both work together to shore up long-term financial health.

Start by eliminating student loans and other non-mortgage debt—the interest you pay on these loans is usually higher than the guaranteed interest you can earn on investments. Once you’re in the black, you may want to park some money in a high-interest Tax-Free Savings Account (TFSA) to cover unforeseen emergency expenses, like rent if you lose your job suddenly.

This may mean you don’t even make an RRSP contribution in your 20s, but that’s okay: unused RRSP room is carried forward. This works out well, since you will likely earn more money in your 30s, 40s and 50s, and contributions made during higher-income years mean more tax savings. However, if you’re earning a substantial full-time salary in your 20s—$50,000 or more, say—an RRSP contribution could be a good idea if you’ve paid off all your consumer debt and student loans.

The key is to focus on developing good savings habits. “You can start by paying yourself first,” says Marc Lamontagne, a fee-for-service adviser with Ryan Lamontagne in Ottawa. Both Bassarab and the DeLenardos can do that by setting up an automatic contribution to their RRSPs. “Every time they get paid, they should put a percentage, say 10%, towards their RRSPs before paying any other bills,” says Lamontagne.

The trick to building savings is increasing your contribution amount every time you get a raise, says Lamontagne. “You are probably used to living on your current salary, so there is no loss if you divert every raise—or part of it—to savings.” You can also boost your savings by using any tax refunds to make another contribution to your RRSP. This in turn will generate a larger refund next year.

You may have heard that when you’re young, RRSPs should be invested mostly in stocks. However, you may want to buck conventional wisdom and invest more conservatively. If you plan to use your RRSP for a down payment, or if you think you might tap it for emergency funds, then it should be in cash, GICs or short-term bonds. “Those small RRSPs may be the only emergency savings you have and if, like Lori, you plan to withdraw the funds in the next couple of years, you don’t want to have to delay buying a home or condo if the market is down,” says Lamontagne.

If your RRSP is truly for retirement savings and you don’t plan to touch it until you leave the workforce, then you can invest more aggressively. A good plan is to invest 60% of your RRSP money in equities and the remaining 40% in fixed income (bonds) using low-fee investments such as index mutual funds.

As for the DeLenardos, they’re ahead of the game and shouldn’t worry too much about saving for retirement yet. “You can always catch up later,” says Schlenker. “And given the small size of the existing RRSPs, high fees shouldn’t be a big concern now.”

For the 2011 tax year (which includes the first 60 days of 2012) you can contribute up to 18% of your earned income in 2010, to a maximum of $22,450, plus more if you have unused contribution room from previous years. But even a much smaller RRSP contribution can help.

To maximize the benefits of RRSPs, you need to make the right financial moves at every stage of life—your 20s, 30s, 40s, 50s and 60s. With a section for every age, we’re going to show you how to make the tough decisions needed to stay on course. To help, we’ve asked other Canadians to share their own struggles and successes at each stage of life. So if you feel you haven’t been making the most of RRSPs, read on.

Maximize your RRSP: Your 20s, Getting started
Maximize your RRSP: Your 30s, Learning to juggle

Doucet, now 36, spent five days in a Majorca hospital before being transported by ambulance to Majorca’s airport and flown to Gatwick Airport in London, England. From there he was transported by ambulance to Heathrow airport and then flown home first class to Brantford, Ont. His insurer, RBC, hired a Canadian nurse to accompany him. The total bill: $22,727.50.

Fortunately, Doucet had spent $63 on travel insurance to cover him for the 11 days he was away. “Best purchase I ever made,” he says. “Quite apart from what it would have cost me if I had to pay for it myself, I don’t know how I would have handled the logistics of getting myself home.”

Indeed, when it comes to preparing for holidays, travel health insurance should be at the top of your list. Provincial health insurance plans offer sparse coverage for travellers outside of Canada and that can mean big trouble if you need hospital care. “It’s really not wise to travel outside of Canada without insurance,” says Milan Korcok, a long-time medical writer and Florida-based editor of Travel Insurance News (travelinsurancefile.com). Even if you’re just popping across the border to do some shopping, he points out, you need to be protected. “Health care is more expensive in the U.S. than pretty much anywhere in the world.”

Fortunately, protecting yourself from medical mishaps on the road doesn’t have to cost a fortune. Herewith our tips on how to keep costs down:

Avoid doubling up on coverage

“We don’t bother with travel medical insurance because we’re both covered through work,” says 35-year-old Alysia Isidros of Mississauga, who co-authors the blog Beachjunkies.blogspot.com with her husband Mike Solon, 33. Similarly, premium credit cards frequently include travel medical insurance and trip cancellation insurance. The caveat: study the policy closely to make sure you know what you’re getting, advises Korcok. Insurers often limit how much they’ll pay out for claims and restrict coverage to shorter trips.

Don’t buy from your travel provider

Most travel agents flog travel insurance, but you can often get it cheaper elsewhere. Consider that an all-inclusive travel insurance package for a 52-year-old on a $1,500 one-week trip to Aruba rang in at $145.80 per passenger through a package tour operator, including up to $5 million in medical coverage. By contrast, online insurance provider travelguard.ca offered an all-inclusive package for $92.88, including $10 million in emergency medical coverage.

My wife and I have a portfolio that is scattered around a bunch of different places—a mutual fund company, a bank investment arm with an advisor, an employer pension-matching plan plus stock options and a self managed discount brokerage account. I am concerned about this. Even though I keep track of the total portfolio using a personal spreadsheet I wonder if I should consolidate all of it into one location?

PS: My wife won’t let me touch her portfolio with the mutual fund company.

Answer:

Imagine taking the contents of your spice rack and scattering them around the kitchen: Cumin by the coffee maker, nutmeg with the knives and paprika peaking out from underneath the potato peeler. While dinner would eventually find its way to the table, it would likely be a time consuming and frustrating cooking experience.

Finding the right level of complexity for your money is one of the most important things you need to do to be a smart person doing more smart things with your money. A lot of people have either too much complexity to keep a handle on everything, or too little to get the results they want.

In your case, it sounds like too much complexity. I have outlined how I suggest you simplify things in this related post, Retirement planning: The question you need to ask yourself. But first let me say that I understand why you’re concerned. Having a portfolio scattered around at different places exposes you to a number of risks. For example:

Over/under diversification

You want some exposure to different asset classes, sectors and geographies—but not too much and not too little. A scattered portfolio makes it harder to gauge how much exposure to a particular stock or sector you actually have. For example, if you hold multiple Canadian Equity mutual funds you might be over diversified—holding a small bit of everything such that your portfolio is unlikely to perform well compared to the benchmark. And you might be under diversified when it comes to your individual stock holdings. You say you have options through your employer, but you’ll want to make sure that those shares don’t dominate your portfolio. That is harder to assess when every thing is scattered around.

My wife and I have a portfolio that is scattered around a bunch of different places—a mutual fund company, a bank investment arm, an employer pension-matching plan plus stock options and a self-managed discount brokerage account.  I am concerned about this. Even though I keep track of the total portfolio using a personal spreadsheet I wonder if I should consolidate all of it into one location.

PS. My wife won’t let me touch her portfolio with the mutual fund company.

Answer:

As I mentioned in my prior post, Retirement savings in different places? Why it’s risky, there are a number of risks to having your portfolio scattered across a number of institutions and/or accounts.

Based on what you’ve told me, it sounds like the issue is only partly that your portfolio is scattered around.  The bigger issue in my opinion is that you don’t have one clear investment plan with one person accountable to execute and track it.  That person could be you but you’ll need to ramp up your involvement significantly.  Or that person could be a financial adviser.  In your case, it might be money well spent.

Here are the steps I recommend you take;

Interview financial advisers

I know you already have one through your bank’s investment arm.  I’d start with him or her, but include others too – a mix of fee-based and fee-only.  The questions I would ask are;

“Are you willing and able to develop an investment plan that takes into account my entire financial picture?”
Some advisers will only include assets that are housed with their company which is understandable given that that is the way fee-based and commission-based advisers are paid.  But some are game to think holistically.

“As an adviser, what would you say you are accountable for?”
Are they accountable for the completion of the investment plan, for the performance of the portfolio, for ensuring that you do what you need to do to meet your goals?  Some advisers take accountability very seriously, and others much less so, preferring to offer only advice which can be taken or discarded.

“How would compensation work?”
For fee-based advisers, the percentage charged typically goes down as the asset level goes up.  For fee-only, it is a flat rate, but goes up with the complexity of the task.

“How do you work with highly-engaged clients?”
Some advisers love people like you, who follow the markets and trade their own stocks.  And others don’t.

“How do you ensure that your recommendations are comparable to the benchmark indexes?”
Some advisors will try to focus you on absolute performance.  But given the stats against active management, I’m a firm believer in looking at performance versus comparable benchmarks over time.

“What does one of your investment plans look like?” Have them show you an example to see if it will meet your needs.

Choose an adviser based on your criteria

Your criteria will likely be different from mine—but to give you an idea, the things I recommend people look for are;

• Delivers performance that meets the benchmark index over time.
• Communicates in a way that works for you.
• Provides solid advice and doesn’t just sell products.
• Understands and works on all your goals.
• Holds you accountable for achieving those goals.

Set expectations with your financial adviser

Unrealized expectations are one of the biggest sources of conflict between clients and their advisers.  This is an opportunity for both of you to talk about how you want things to go.   Have this conversation even if you stay with your current adviser.

• Investment plan: What does it include, how often will we revisit it? Etc.

• Review of results: How often will it occur and how will the performance information be generated given the various accounts?

• Accountability: When something goes awry—and it will—how are we going to handle it?

• Communication: How often will we communicate and by which method—phone, in person, email?

• Trading at the discount brokerage: What do we need to agree on in terms of parameters for the trading at the discount brokerage?

Bottom line:  Have one investment plan and one person accountable to execute and track it.  That is going to be the best way to ensure you avoid the risks of scattered portfolio and get the best results over time.

PS: I would respect your wife’s boundaries on her portfolio.  But you might consider checking out the performance of the funds she holds and see how they stack up versus the benchmark index over time.  She may be in great funds that have been doing well against the benchmark.  Or she may be in funds that aren’t so great and you could help ensure that she’s in the best products her company offers.

I learned the hard way that if you don’t know what you’re covered for, your home insurance won’t do you much good. Read on, and I’ll fill you in, so you won’t flush good money down the drain like we did.

What kind should you get?

Home insurance generally comes in three different flavours: basic, broad (also called “standard”), and comprehensive. Basic is cheap, but doesn’t protect your home’s contents, so it’s not typically used by homeowners. Broad only covers you from “named perils” that are specified in the policy, and nothing else. Comprehensive, or “all perils” insurance works the opposite way: It covers you for all conceivable calamities except a list of excluded items—typically earthquakes and floods—along with natural wear and tear, mechanical breakdown, settling, and deterioration. This is the kind most homeowners get, and it’s the kind that Fred de Francesco, an insurance agent with Hugh Wood Canada, strongly recommends.

If you get comprehensive insurance, be sure to run a comb through the exclusion list before you sign: “One company may exclude water damage, while another company includes it,” says de Francesco. Similarly, “some policies may restrict coverage during home renovations, while others have no such clause,” he says. Work from your home? Make sure your policy allows for this scenario. Otherwise, your insurer could decline to cover you when you make a claim.

You can pay extra to add “riders” to your policy to cover items on the exclusion list, and if you live in an earthquake-prone region in B.C., says Lindsay Olson, a vice-president at the Insurance Bureau of Canada, there’s a case to be made for purchasing earthquake insurance separately.

Of concern to a broader range of Canadians, sewer backup “has become a big peril for today’s homes,” says Generations Insurance agent Vicki van Santen. If your base policy doesn’t include it, it’s the one extra you should probably always add.

How much coverage do you need?

Don’t confuse the value of your policy with the market value of your home, which includes the land your home is sitting on. Your policy only needs to provide you with the funds to rebuild your home or repair its structure if it gets damaged.

These days most insurance companies assess the cost of rebuilding your home for you, so you don’t have to worry about how much coverage to get. So-called “guaranteed replacement cost” policies cover the cost of rebuilding your home when it gets damaged, no matter what the amount—even if the insurance company underestimated how expensive it would be. Remember, though, that when you renovate, you have to let your insurance company know, says Olson, as that will affect the replacement cost.

A better deal

When you’re buying home insurance, you’re almost always better off using an independent broker who deals with a number of insurance companies, so he or she can get you the best price possible.

To keep your premiums as low as possible, consider bundling your home and auto insurance policies together. “Using the same insurance company for both could shave up to 15% off your total bill,” says personal finance guru and author Gail Vaz-Oxlade. Other measures that could give you a break on premiums: a monitored burglar or fire alarm, a sprinkler system, and—believe it or not—quitting smoking. “Many fires are caused by careless smokers, and insurance companies recognize that non-smokers have a lower risk of fire loss,” says Olson.

Don’t forget what’s inside

Most comprehensive home insurance policies include contents insurance, which covers the cost of replacing your belongings, up to a set amount. But Margot Bai, a former insurance agent and author of the book Spend Smarter, Save Bigger, says this is one area where you could save money by taking the “named peril” route and only insuring big ticket items.

“If you make a claim every time the dog chews on your dining room leg or you drop wine on your laptop, the company could decide not to renew you,” she says. “You get contents insurance to cover the big stuff.”

It’s not as far fetched as it sounds. Toronto’s Mark Skaff recently enlisted his 2003 Mazda Protégé Sport to vouch for him when he joined a trial Pay-How-You-Drive (PHYD) insurance program. He agreed to let his insurance company monitor how he drives using a small electronic recording device in his car, and in return his provider offered him the opportunity to lower his insurance premiums.

Skaff only uses his car to haul groceries and run errands. For the past two years, he shared the tracker data with his insurer every six months. “I knew I would save something,” he says, but the outcome still surprised him.

Such Pay-As-You-Drive (PAYD) and Pay-How-You-Drive (PHYD) programs are slowly gaining popularity in the U.S., but they’re not widely available here—yet. Both rely on telematics, or remote information exchange, using trackers and a car’s on-board diagnostic system to create a clearer picture of your driving habits. The system lets your insurance company monitor how often you drive, when you drive, and whether you make a habit of screeching to a stop or roaring down the street.

The program Skaff enlisted in—the only one in Canada so far—is currently on hiatus. But once Canadian insurance companies fully commit to such programs, they would make great sense for value-conscious consumers, says Dave Huber, an insurance telematics expert, and president of Kairos Solutions. Both systems are user friendly: drivers can plug the trackers into their on-board diagnostic (OBD) port themselves. And sharing the information is equally easy. Skaff uploaded his data into his home computer, and newer systems do it wirelessly.

Depending on the policy, a PAYD or PHYD program “could save 20% to 40% if the telematics confirms that you don’t travel at night and you are a cautious driver,” says Clem Driscoll, a telematics expert and managing partner at C.J. Driscoll & Associates in Los Angeles. And a few wrong moves won’t cost you. “Companies who offer this are saying, ‘we will not raise your rates based on the info we gather.’ Even if you’re not the safest driver, it won’t hurt you,” he says.

Some worry about the Big Brother aspect of tracking, and it’s a valid concern. Although the programs don’t record where you go, they do record a lot of personal driving information, and participants should ask their insurance company exactly how that data will be used, and who it will be shared with.

As the programs gain ground here, more drivers will soon face the choice Skaff made—but he says he would do it again in a heartbeat. After all, his $1,500 annual insurance bill quickly shrank to $1,200, netting him $300 a year in savings. “Someone with driving habits that are more risky might not be comfortable sharing their information,” says Skaff. “But that’s exactly how low-risk drivers, like me, are able to save money.”