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

The biggest mistake you can make financially as a new Canadian is to jump into something you don’t understand simply because it’s the way everyone else is going. While seeing the opportunities and making them work for you makes good sense, adopting bad habits does not.

You also can’t assume that the universal benefits you hear about will apply to you. Everything has a rule, and if you don’t fit the rule, you don’t get to play in the game. Our government pensions are a good example of this. You can’t assume you’re going to get the maximum amount talked about in the media and in financial brochures. There are specific rules for qualifying for the maximum and anyone who has lived in Canada less than 40 years likely won’t get the maximum amount available from Old Age Security (OAS). (See my next blog for more on this.) Since the Canada Pension Plan is a contributory system—what you take out is based on what you put into the plan—you might not get the maximum from that plan either.

If you come from a tradition where children take care of their elders and your family maintains that tradition, then you’re very lucky. However, know that life for your children in Canada will be very different than you might now imagine. They will experience their own struggles to make a home for their family. If they marry out of your culture, that may create tension if you try to move in later. And if they must relocate for work—and relocation is a way of life in North America—will you want to move away from everything you have to live with your immediate family? If not, you better have enough money to take care of yourself.

I’m getting focused on my retirement plan and I know you are nuts about people calculating their net worth as a part of the plan. I’m doing mine now but I’m not sure which value I should use for my house—the value estimated from my property tax assessment or the sale price of a comparable property.

Answer:

Online dating can teach you a very important lesson about calculating your net worth. I’m not kidding. A smart and sassy friend of mine recently threw herself into the online dating pool—which turns out to an appropriate metaphor based on her experience so far. She has shared a number of insights, including this classic: What looks good on paper doesn’t necessarily look so good in real life, even under the muted lighting of her local café.

In online dating, meeting someone who looks good on paper is the booby prize. The same goes for your net worth. What you really want in both areas is something that looks good in real life.

Which brings me back to the value of your house. The simple answer to your question is to put down the lesser of the two values on your net worth statement, though I don’t think it really matters which one you choose. The more important point is to focus on your net worth in real life and not on paper.

In today’s steaming-hot real estate market many homeowners have an inflated sense of personal wealth because of how much their house is now worth on paper. However, this number can be a red herring on your net worth statement, especially when it comes to retirement planning. Here’s why:

After you stop working, you’ll still need income to pay for groceries. A pension might cover some of your expenses, but most of us will need the income from our retirement savings to meet our needs, groceries, hip-hop lessons, a weekly shampoo and set, etc. Aside from renting rooms out or getting a reverse mortgage, the only way to unlock the value of your house and access its income potential is to sell it, move somewhere cheaper and invest the net proceeds. The problem is, most of us won’t be willing to do that. So while “on paper” your house is worth $1.3 M, in “real life” you’ll be relying on your investment portfolio to provide the income for your groceries.

Focus on building your net worth over time, but especially focus on assets that can provide an income for you in the future, like your investment portfolio or rental properties. You don’t want your “on paper” real estate wealth to drive stupid decisions. Just like you don’t want a 10-year-old, photoshopped online dating photo to prompt a marriage proposal.

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.

As everyone knows, an RRSP account is where retirement savings goes. But less people know how to structure the account to make sure there’s something left at retirement. It comes down to one thing, says Gardner; holding long-term assets. Whether it’s a fund, ETF or stock, the investment needs to last for years, if not decades.

That means owning large-cap investments. Typically, larger companies with a market capitalization of at least $10 billion are safer than smaller ones. A mutual fund that holds Canadian bank stocks won’t rise in value as quickly as one that holds junior mining firms, but it won’t fall nearly as quickly either. Not only do large caps decrease volatility, but these companies, especially multinationals, aren’t nearly as likely to go bankrupt. A fund that holds decades old brands such McDonalds and Coca-Cola, for instance, will likely be around for the long-term.

AJ Sull, president and chief investment officer with Vancouver’s Pacifica Partners Capital Management, says dividend-paying companies should also be an integral part of an RRSP portfolio. There’re good for two reasons, he says. The first is that people don’t have to worry too much about whether their investments are increasing in value; regular dividend payments will keep money flowing into account. “You’re getting paid something while you wait for the stock price to rise,” adds Gardner.

The second is that dividend payments allow Canadians to buy more fund units or ETFs without adding to the principal. Ultimately, the more assets you own the more you’ll have when it’s time to retire. Imagine how much larger your portfolio will be after reinvesting dividends for 30 years.

Not only do Canadians have to buy long lasting investments, but a good RRSP also has the right asset allocation. Steven Belchetz, president and chief investment officer with Toronto’s T.E. Wealth, says that retirement portfolios need to be diversified globally. Canada’s market is concentrated in just three sectors, financials, materials and energy, so having too much domestic exposure could be risky.

For the equity part of an RRSP, Belchetz recommends having 50% of assets in Canadian securities, 25% in the U.S. and 25% in international markets. You still want to be more heavily weighted towards domestic securities because of the currency risks around non-Canadian investments.

When it comes to bonds or bond funds, what to buy depends on risk tolerance. Government bonds yield around 2%, but they’re extremely safe. Corporates have a better yield, but they’re riskier. Either way, the basic rules around age and asset allocation remain; own less bonds when you’re younger and more when you’re older. Sull says investors should have, at minimum, 20% of their RRSP assets in fixed income.

By sticking to large-cap, dividend-paying securities your retirement should be secure. Save your risky buying and selling for another account, says Gardner. “No matter if it’s an ETF or mutual fund, RRSPs should hold the core long life assets,” he says. “It’s not for the newest and craziest trading strategy.”