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Why giving your grown children an allowance may make financial sense

Posted on August 25, 2014 by Ted Rechtshaffen in Financial Planning

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There is a saying “once your child, always your child.”

For many seniors, the new saying is “once a dependent, always a dependent”.

So does it ever end?

With reports suggesting that today’s seniors are the richest in history, maybe it shouldn’t end. As the pile of cash for some wealthy seniors keeps growing, the question of how to disperse this bounty is of growing importance.

Seniors often fear that by passing on their wealth too early they will kill ambition in their offspring, or leave the money vulnerable in a marriage breakup. Maybe they are just too inherently thrifty to give it all away or maybe they aren’t sure how much they will need themselves.

For those seniors inclined to help out their grown children, what about an adult allowance? Maybe this little handout isn’t something that needs to stop when they are 16 and get their first part time job. While the image of dear old dad handing out a shiny new quarter to his 37-year-old son each week may seem pretty comical — perhaps it is just our new reality. A BMO report recently said the typical senior today is nine times richer than the typical Millennial.

The practice of giving allowances to children began around the beginning of the 20th century.  The idea was that giving children an allowance taught them how to budget, how to make choices in spending, and hopefully helped them to become better savers and smarter consumers.

An  adult allowance has the same basic ideas as the child allowance:

  • The parent that has some excess wealth will provide some new source of regular income to a child, that will allow them to enjoy special treats or to live more comfortably.
  • Rather than simply buying things for the child, a more modest, regular allowance will teach the child how to save up for something that they really want.
  • Ideally a portion of this allowance might be saved for an emergency fund or some very long range but important goal.

14484926_sI am sure that the idea of an adult allowance causes a stress inducing pain for many readers. I can hear the comments now…’why can’t the kids of today pick up their own bootstraps,’ ‘when will they ever stand on their own two feet,’ ‘they clearly didn’t learn any valuable lessons with their allowances as kids, why would they learn anything now?’

To those reader comments in my head, I share your pain.  But if not an adult allowance, what are the options for wealthier older parents when it comes to ideas on what to do with their money?

The three standard options are:

  • Start spending more on yourselves. The only problem is that for many people, they already have what they need, and they are who they are. This means that other than a short term blip, they tend to go back to the same reasonable spending ways that helped to bring them their wealth in the first place.
  • Another option is to give much more to charity. This certainly has its merits, but for many people they would much prefer to keep their wealth (or at least the majority of it) in their family. Maybe there is much more room for many people to give to charity than they currently do, but it almost requires a cultural change to get this to take a larger place in someone’s spending.
  • If not on themselves or to charity, it means that extra wealth (whatever won’t be spent personally in your lifetime) will end up with the children or family members anyway.

If you are very likely to be leaving money to your children, probably the worst way to leave the money is still the most common method – through a Will.

Among the problems with a Will is:

  • in most provinces it faces a probate fee that can add up to a 1.5% tax on the estate
  • the funds will go to adult beneficiaries in one large lump sum that may not be managed appropriately by the beneficiaries
  • more and more people receiving the inheritance are already in their 60s, and could have used some of the money years before, but don’t need it now
  • in some cases the funds could be used in a much more tax efficient way by the adult children than by sitting in the parents large taxable investment account year after year
  • the parent never gets to see the benefit of their giving

You could choose to give while you live in one or more large lump sums. This could be a reasonable way to give as long as you are very confident that you can afford to give the lump sum, and that your children or other beneficiaries will do something reasonable with a large gift.

Another alternative is simply to go back to giving a weekly or monthly allowance – just like you did many years ago. While this method won’t help with major challenges like a house down payment (and it doesn’t preclude a larger gift), there are some meaningful advantages.

The first is that the parents maintain a greater degree of financial control. After all, it is tough to ask for the cheque back on a big gift if you change your mind. For the child receiving an allowance, it can become part of their family budgeting, and something that they can reasonably count on. It may not have the wow factor of a big one time gift, but it may also be something that the children can effectively manage financially.

Like all issues involving family and money, each family is different. Where the children are financially astute and responsible, there is much less concern with larger gifts. However, where those strengths may not be in place, a regular allowance may make much more sense.

One final note in favour of the allowance. We are seeing more potential issues these days when a parent gives a large gift to a married child, and the child subsequently gets divorced. While it used to be a little easier to put a gift in the form of a demand loan, and call it back, there have been some recent court cases where the judge ruled that a loan with no regular interest payments and no expectation of being repaid, is the same as a gift, and is therefore part of the family assets to be split in a divorce.

When it comes to helping adult children financially, it makes sense to be a little proactive if you have the wealth to do so. The typical approach to estate planning usually only helps the government to get more than its fair share.

Of course, once you start thinking about all sorts of fancy strategies, sometimes the old tried and true of an allowance is one of the best.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 16th August 2014.

Four things you might not know about investment fees

Posted on August 25, 2014 by Ted Rechtshaffen in Investing

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12882218_sMany mutual fund investors simply don’t know what they are paying or even that they are paying anything at all. A research study was done in 2013 by Environics of 1,004 Canadians over 25 years old and with more than $25,000 in investable assets. Of them, 25% said that they did not pay their advisor either directly or indirectly. Another 19% knew they paid something but didn’t know what that might be.

With a new regulation called CRM2, by mid-2016 you can expect a statement that will show in actual dollar terms the total fees that you are paying. For at least 25% of mutual fund investors, this will come as quite a shock.

Here are four things about investment fees that many people might not be aware of:

Investment management fees can be tax deductible This applies to fees paid to a professional portfolio manager to manage a taxable investment account. It does not apply to mutual fund fees or stock trading commissions.

What this means to you: If you have meaningful non-registered investment assets, and are paying marginal income tax of 46%, then you might be able to get 46% of your investment fees refunded in your taxes. Generally speaking, this would only apply if you are working with a discretionary investment counsellor or a broker using a fee based account.

Mutual funds could have high fees to sell In many cases mutual funds sold by an advisor have some form of holding period, or additional fees will be charged to you. The only way to avoid the fee entirely is to either hold on to the mutual funds for as long as eight years or sell a fund but move the money to another fund within a particular mutual fund family. This isn’t the case with ‘no load’ funds, but in the worst cases with deferred sales charges or DSC version of funds, you would have to pay a fee of 7% of your assets to sell the fund and pull the assets out in the first year.

What this means to you: Try to avoid holding DSC mutual funds. Ask your advisor if you do hold them, and if so, why, and what would the fee be today if you sold the funds and pulled the money.

Hedge funds and performance fees As if fees weren’t high enough, some smart hedge fund manager created the idea of performance fees. In many cases, a performance fee would charge you 20% of the gains above a certain benchmark. Sometimes at least the benchmark’s are fairly high – like an 8% annual return and sometimes you pay a performance fee on all gains. Let’s say a fund returns 8% after management fees of 2%. In some cases this may mean the fund charges 2% plus 20% of 8%, for a total fee of 3.6%. If the fund has a performance hurdle of 8%, in this example it would mean the fund charges 2% plus 20% of 8% minus 8%, for a total fee of 2%.

What this means to you: If you are going to pay very high fees, you better be getting extra skills and benefits. There are a few hedge funds like King and Victoria, Venator, Agilith and Donville Kent that have actually earned their fees, but a much, much longer list that have not.

Managing investments yourself is cheaper, but is it right for you. Much like painting your own house, doing your own gardening, growing your own food, or knitting your own clothes, you will save on costs by doing it yourself vs. having a professional do it for you.

The question for any of these is no different than managing your own money. Do you enjoy doing it? Are you any good at it? Do you have the time to do it? What is the risk or cost if you do a poor job? If you answered yes to the first three questions and are comfortable with the risk, then you probably should manage your own investments.

What this means to you:  The question that every do-it-yourselfer has to ask is ‘Will it end up costing me more to do it myself?’ As noted above, while professional investment management fees can be as high as 3% or more a year, there are many people getting professional discretionary investment management for fees well under 1% a year after tax.

As a final word, I would say that investment fees are not the only important factor when it comes to your wealth management. Advice on areas such as advanced tax strategies, financial planning, debt, insurance, trusts and estate planning can add meaningful value beyond investment fees.

The key to being an educated financial consumer is that you must understand what you are paying, how someone gets paid, and the value that you are receiving. If you know those three things, you can make an informed decision about fees that is right for you.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 15th July 2014.

TriDelta Investment Counsel – Q2 2014 investment review

Posted on July 4, 2014 by Ted Rechtshaffen in Bonds, Equities, Investing, Quarterly report

Executive Summary

The summer heat is upon us. We Canadians dream of summer for 9 months of the year, and the only bad part of the season (other than sunburns and bugs) is that many investors think the markets fall in the summer.

The good news is that it isn’t true (at least in Canada). While it is true that Q1 and Q4 are historically the best performing quarters, in Canada, in the last 10 years, July and September have been positive 60% of the time and August has been positive 70% of the time. Overall for Q3, the average return has been 1.29%.

Even in the US, most summer months have positive returns. Six out of 10 times July and August have been positive, while 8 out of 10 September’s have been positive. The challenge is that when they were down, they were really down. The average Q3 return in the US over the last 10 years has been -0.85%.

The overall message here is that after the first 6 months of the year, where overall returns have been strong – especially in Canada – recent history suggests that the summer is a quieter time for the markets. The recent string of 1%+ return months may just come to an end.

The key is not to overreact to the ‘interesting’ items like seasonality, but to remain focused on earnings, interest rates, and direction of financial trends. As a result, we will continue to be almost fully invested at this time, with a lean towards stocks, as the alternatives to stocks do not seem as strong in this environment.

The Quarter that Was

Stocks – Canada and Global

12886414_sThe second quarter was a great one for those invested in Canadian stocks. However, if you were invested outside of Canada, the strong Canadian dollar pushed most global market returns to neutral or negative. To be more specific, if you were invested in Canadian Energy and Minerals it was a great quarter. If not, the quarter was nothing special.

The second quarter saw strong returns for the Canadian TSX up 5.7%. This was led by the Energy sector’s 13% returns. Given that Energy makes up 27% of the TSX, everything other than Energy was up just 3%.

The S&P500 saw returns of 4.7% for the quarter, but a rebound in the strength of the Canadian currency brought these returns down to just 1.2% on a Canadian dollar basis. In fact the 30 stock Dow Jones index was down 1% in Canadian dollar currency this quarter.

To put Canada in perspective, it is the 2nd best performing market to India this year, among the 10 biggest world markets.

On a Global basis, returns in Canadian dollars were negative to flat across most of Europe and Asia.

Bonds and Preferred Shares

Once again, bonds did reasonably well given that interest rates actually declined slightly again this quarter. In fact, rates are so low that you can get a 5 year fixed rate mortgage as low as 2.79% – this is the lowest rate in history. These low rates are translating into decent bond returns. The Canadian bond universe was up 2.0% on the quarter, and 4.8% on the year.

Preferred shares kept pace with the bond market, with returns of 2% on the quarter and 4.5% on the year.

How did TriDelta Clients Do?

Stocks

In most quarters growth oriented clients have had stronger returns than conservative, income oriented clients. In the second quarter, these roles were reversed.

Our more conservative stock portfolios saw returns of 4%, with Suncor Energy (up 18%), Apple (up 16%) and Canadian Natural Resources (up 15%), leading the way. This performance was particularly strong given that over 40% of the portfolio is invested outside of Canada and was hurt by the strengthening Canadian dollar.

Year to date, conservative equity portfolios are up over 9%.

Our growth portfolios were light on energy, and it impacted returns. Equity returns were 1% for the quarter. In fact, the two best performing stocks were precious metals names, Tahoe Resources (up 20%) and Agnico Eagle Mines (up 16%).

Year to date, growth portfolios are up 8%.

Bonds

On the fixed income side, TriDelta saw tremendous returns, although they still couldn’t keep up with equity markets. After a 2013 that ended up with negative returns in many fixed income portfolios, most clients have seen bond returns of almost 6% year to date (2% on the quarter), and preferred share returns of almost 8% year to date (2.5% on the quarter). The bond numbers beat the Aggregate Canadian bond universe by over 1%, while the preferred share numbers are 2.5% better than the preferred share index on the year.

During the 2nd quarter, we repositioned the preferred share model to become less sensitive to longer term interest rates. We have now concentrated a significant portion of the model with 5-year fixed-resets that should coincide with when the Bank of Canada is in the position to raise rates. In other words, the next 5-year fixed rate will reset around the time when we believe the markets would have priced in central bank hikes in 2015.

TriDelta High Income Balanced Fund

Some clients who are accredited investors ($1 million+ in investment assets or $300,000+ in household income), have been able to invest in the TriDelta High Income Balanced Fund. This pooled fund aims to deliver high yields, and broad diversification, through stocks, options, and low cost leverage of bonds. Year to date the fund has returned over 9%, and has been in the top decile (top 10%) of all balanced income funds in Canada. We are very pleased with the performance of the fund so far this year.

Pending legislation changes may mean that the Fund could be available to all non-accredited investors soon. We will keep you posted as soon as this change comes into reality.

Dividend Changes

We continue to pay close attention to dividend growing stocks. We believe that this is a strong part of long term, lower volatile investment success. Again this quarter we are pleased to say that there were no dividend declines, and the list of ten dividend growers are as follows:

Company Name % Dividend Increase Company Name % Dividend Increase

Goodyear

+20%

 

Exxon Mobile

+9.5%

Apple

+7.8%

 

Baxter

+6.1%

Johnson and Johnson

+6%

 

Aimia

+5.9%

Telus

+5.6%

 

National Bank

+4.3%

CIBC

+2.0%

 

Weston

+1.2%

The Quarter Ahead

Three items drive our thinking in the quarter ahead:

  1. Interest Rates
  2. Canadian Dollar Valuations
  3. Corporate Earnings

Some may be surprised that Ukraine, Iraq and other world hotspots are not on our list. These are definitely factors in the markets in the short term, but except in terrible cases, these political hotspots tend to have little mid-term or long-term impact on market performance. Given the lack of ability at predicting how things flare up in the short term, we try not to let them impact our overall investment thinking.

Interest Rates

In Canada, the last inflation rate announcement showed an inflation rate of 2.3%, the first time in 2 years the rate was above 2%. In general, this would lead to a push towards nearer term interest rate hikes. However, Canada’s inflation rate was as low as 0.7 per cent as recently as October 2013. In addition, volatile energy prices pushed inflation up in the past couple of months, but could just as easily bring inflation down with a late summer decline in oil prices.

While we are a little more wary of short term interest rate hikes after the May inflation numbers, we still don’t see a move before 2015. The front end of the yield curve is expecting overnight rates in Canada to move up 50 bps (0.5%) by the end of 2015.

On the longer end of the yield curve, interest rates could easily move higher, back to the higher
end of the trading range witnessed last year given a change in appetite for risk free government bonds. We don’t anticipate sudden jumps, but we don’t see the 10-year Canada and US treasuries remaining below 2.40% and 2.65%, respectively, for much longer.

While we believe for the first time in a couple of quarters, that the direction for interest rates is going to finally be up from here, we expect the pace to remain slow, and as a result, this shouldn’t provide any meaningful shocks to the stock market. Slow interest rate moves shouldn’t spook the market considering that rates would have to rise meaningfully (2%+) to once again be a strong alternative to stock investors.

With bonds, we have done a good job anticipating the decline in rates, and we have begun to make adjustments in anticipation of a rise in mid to long term rates.

We shall remain overweight corporate and/or high yield bonds as clients are rewarded with higher income, and there remains scope for such bonds to outperform government bonds in a rising interest rate environment. We are a little heavier invested today in shorter term bonds with intentions to pick-up bonds at higher interest rate levels (and buying longer term bonds) when the bond market adopts a more stable to declining interest rate outlook (possibly in Q4).

Canadian Dollar Valuations

28594289_sWith the Canadian dollar hovering just under 94 cents US, many pundits have been surprised by the Canadian dollars’ strength. Certainly the strong gains in oil price have helped, but the sense is that Canada’s central bank is more likely to raise rates before the United States, and that higher yield on Canadian treasuries vs. US treasuries will continue to support Canada’s dollar.

We believe there is still a little room to run higher, but we also believe in investing a meaningful portion of portfolios outside of Canada. As we see a Canadian dollar rise above 95 cents, we may start to look at adding to our global investment weighting to possibly take advantage of currency moves in the other direction.

It is important to remember that with investing 35%+ of stocks outside of Canada, the US dollar is the biggest investment in your portfolio. As such, we pay close attention to currencies, and look for opportunities to add value to your overall returns.

At the beginning of the year we predicted the Canadian dollar would be at 90 cents at year end. We still believe this, but in the short term (the Summer) see a stronger Canadian dollar ahead.

Corporate Earnings

Earnings in Canada grew by more than the U.S. as Canadian companies had a strong surprise on revenue and profitability beating estimates by more than 4.5%. This along with the positive outlook going forward should help drop valuations (price earnings ratios) from a current 20 times earnings to 15 times if the growth keeps coming. In the next 12 months the markets are expecting a 29% growth in earnings. We will watch this closely since if estimates start falling this could be a head wind pushing down the market.

So far, however, there has been little to suggest a slowdown in earnings is upon us.

Even with the very low US GDP numbers in Q1 of -2.9%, most economists believe that this is a short term weather related blip. We have simply not seen real signs of a US slowdown, and certainly not signs of an earnings slowdown.

Summary

When we combine our outlook on interest rates, exchange rates and corporate earnings, we may see a slowdown from the significantly strong market returns of the last 3 quarters, but we remain bullish on the markets overall.

We may be a little slower at times to invest cash in this environment, but it isn’t because there are not great stocks to invest in, but more a case of watching a few of these names and trying to enter at a point of weakness for the individual company.

All the best for a great summer!

TriDelta Investment Management Committee

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Executive VP

Lorne Zeiler

VP, Wealth Advisor

When it comes to siblings and supporting parents financially, things can get complicated

Posted on July 3, 2014 by Ted Rechtshaffen in Financial Planning

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When I was growing up, my paternal grandmother lived independently. While I was never involved in the details, it was quite apparent that her children were helping her financially. I didn’t give it a second thought.

Now that I think about these things for a living, I wonder when it all changed. When did adult children stop supporting older parents, and when did it start to go the other way?

In the time before pension plans and government social security programs (for the most part, prior to the 1950s), it seems very logical that those that were working and had money coming in, were responsible for those that had no income.

The Old Age Security that we know today didn’t fully come into place until 1952. The Canada Pension Plan (CPP) was launched in 1966. These changes along with major shifts in company pensions beginning after World War II had a significant change on the financial independence of seniors in Canada.

Based on a 2011 U.S. study by ForbesWoman and the National Endowment for Financial Education, 59% of parents financially support their adult children who are no longer in school. Clearly a great deal has changed in the past 60 years.

We continually hear the tale of adult children struggling to live a financially independent life.

What has been out of focus, but is becoming more common again, is the case of adult children supporting their parents.

Even with the changes in pensions, for those that are living into their late 80s and 90s, in some cases, the money is simply running out. This usually comes up when we ask middle aged clients the question “Outside of yourselves, do you see your parents as being an added expense over time or are they financially independent. If independent, are you likely to receive a meaningful estate?”

The answers to this question range across the map.

When adult children ask us about supporting their parents, I ask first if they can afford to help and if so, by how much. I also ask if there are other family members that are able to contribute.

2839811_saThis, of course, is just scratching the surface of the issues. When someone needs financial help, one of the questions is why? Today, when adult children have to support their parents financially, some questions and issues might include: why didn’t my parents save better, why do they spend money they don’t have, are they too proud to ask for help, why should I help if my siblings can’t, they didn’t support me or weren’t there for me so why should I be there for them?

These can be complicated issues. Even tougher, this question often grows into one of cutting costs by having the parents move in with the kids. That creates another large set of issues that go beyond the scope of this article.

If we go back to my initial three questions, these do require some long term financial planning to properly answer. Just because you can afford to help this year, or for the next few years, what will it mean for you when you are in your 80s or 90s?

Are you essentially putting yourself in the same position as your parents with every cheque you write? Even if you can afford to help, can you afford $1,000 a month? What if your parents need $2,000 a month?

Just as important is financial planning for the parents. Ideally this planning happens long before money runs out so that solutions can be worked on. These solutions often relate to selling a house and possibly renting. They may involve cutting back on spending. If young enough, they may involve continuing work or doing a new job. Essentially, making the tough decisions to try and prevent being a financial burden to their children. If the financial problems are well entrenched, this can often be the catalyst for bringing other family members into the discussion.

When it comes to the issue of siblings and supporting parents financially, things can get complicated. While in theory it would be nice if two siblings split the support 50/50, quite often someone shoulders most or all of the load.

How open should the process be? Should there be an open family discussion with everyone involved? If only one child is financially able and willing to help, should it be a private arrangement to protect the feelings of the parents?

In my experience, there is value in being open with financial difficulty. It can often relieve the stress of trying to pretend that things are fine, and can begin the process of addressing the problem.

Unfortunately, families are very complicated. In some cases, it is much simpler (while not necessarily fair) to keep the discussion between parents and the one or two children who can help financially.

The good news is that children who can help, are often happy to do so. They feel good about helping the people who have helped them the most along the way. There can even be a strengthening of the bonds between parents and children through this reversal of the traditional roles.

Maybe we simply weren’t meant to be financially independent in each generation. It is a good goal to have, but maybe we were really meant to have multiple generations supporting each other. History suggests that rather than children helping parents being a new trend, it has actually been the norm for centuries.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 14th June 2014.

Here’s why you should show your group pension plan some love

Posted on May 21, 2014 by Ted Rechtshaffen in Pensions, RRSP

ted_financial_postIf your boss offered you a $5,000 raise for the same amount of work, would you say no?

That fact is that many Canadians are turning this down by not taking advantage of their companies matching of RRSP contributions.

The obvious reason is that money is tight for many people and the idea of having less in your pocket each paycheque can be painful. But the question must be asked: What else are you doing with your money that will return 100% (if there is full employer matching)?”

The answer is very likely “nothing.” Does it really make sense to pay down your mortgage faster when interest rates are 3%, than to take $5,000 and turn it into $10,000 immediately in a tax sheltered investment? Even if you are not paying the mortgage faster, what about borrowing an extra $5,000 or $10,000 from a line of credit to take advantage of pension matching. This is on top of the tax deduction for making a contribution to your retirement plan. I understand that there may be cases where you simply can’t afford it today. That is OK.

However, make sure you understand what you are missing and take a good look at your budget to see if you can somehow find the money for it.

We always recommend maxing out the amount of company contributions you can get. It may be something like 3% of salary contribution from the employee matched fully by 3% of contributions from the company. Sometimes it can be much better, with employer contributions as high as 12% of salary in some quasi-government plans.

Missing out on employer contributions is just one of the major problems. When reviewing Defined Contribution or Group RRSP plans with people, we often find five major mistakes.

1)     They aren’t maximizing the contribution from their company/employer.

2)     They are far too conservative, often with a meaningful part of their plan in money market.

3)     They ignore the plan for years on end, often making a change only when the stock market had a major downturn.

4)     They ignore the rest of their financial world when setting up their Group RRSP plan.

5)     They have no idea what fees they are being charged.

The main reason we find these five mistakes is that employees are simply not being educated on their plans. They are left to their own reading and decision making on something that they are not always able to understand. They have been essentially abandoned by their employer AND by the company or broker that sold the plan to the company.

In many cases, if someone does ask their HR department questions about the plan, the HR department is either uncertain of the answers or they are afraid of taking any risk around advice, so they often provide less than adequate answers.

Aside from education, why might someone not take the employer contribution in a plan?

Tied to a lack of education is the overly conservative asset mix of many plans. In some cases these plans have a default contribution of new money into money market, and these funds that are returning 1% or less, can become too large a part of the plan.

8399526_sWhat many have to realize is that a pension plan is a very long term investment plan – even for those near retirement. If someone is 35, this money will not likely be touched for at least 25 years, but that is only the top of the pile of money. That pile of money is supposed to last until they pass away. If they live until 90, that means that some of those investments will be a 55 year investment.

If some of that amount is left over, then it has an even longer investment horizon as it passes to the next generation. So even if you are near retirement, it isn’t as if you need all of that money the day you retire. Some of that money may still have a 30-year time horizon.

This long time horizon allows you to handle the ups and downs of the stock market, and will usually mean that if invested more aggressively, you will have more money in 30 years than if you invested with a high percentage of money market and bonds. Too many people are leaving too much retirement money on the table because of investing too safely.

Sometimes conversations about Group RRSPs start off with “I haven’t touched this in 10 years.”

This isn’t necessarily a bad thing, if it was set up properly initially. One of the problems is that many plans have expanded or improved their investment offerings, and by not reviewing things for years, you may be missing some opportunities for lower fees, greater diversification, or access to better investment managers.

Another mistake that we see is that people don’t consider their broader financial picture when deciding what to do with their pension plan at work. For example, does a spouse have a defined benefit pension plan that will provide a steady retirement income? If they do, then you should definitely look at being more aggressive with your Group RRSP. On the other hand, if there is little other retirement money being set aside in your household, then you may want to be a little safer with your Group RRSP money, as it may be the key provider of retirement income. What about the amount of net worth in real estate or likely inheritances?

If these are large, and cash flow is tight today, maybe you really are OK not contributing to your Group RRSP plan.

In terms of investment fees, Group RRSPs should have lower fees in general. This is because they can be managed as part of a big plan. The reality is that investment fees on these plans are all over the map.

Keep in mind that the fees are as high as possible to still close the business with a company. That means that if it is a smaller company that hasn’t negotiated well, you may be paying 2%+ in fees on your Group RRSP plan. In cases of very large companies who have negotiated well, the fees could be less than 0.5%.

This information is important, because if you are paying high fees on your Group RRSP plans, you may be able to shift a large portion of your plan to your financial advisor or to manage it yourself. This doesn’t mean giving up on the employer matching benefits. It simply means moving a portion of the plan (your employer can tell you what is able to be transferred) to be managed outside of your Group RRSP plan, and now would either be part of your personal RRSP or into a LIRA (Locked in Retirement Account). You would then have much more freedom on investments and possibly lower fees.

When I think of some of the mistakes that are being made on this very important part of people’s retirement plans, it reminds me that many people need to take some action to learn more. If you can’t get some advice and guidance through work, then ask your financial advisor, and if they don’t help, then you may need to do some more research on your own.

After all, for more and more of us, this is your pension. Show it some love.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 20th May 2014.