Hi Lou:

Love to listen to you every morning and hear your wise and witty comments.

I don’t think anyone has addressed the problem of senior citizens already retired who have no company pension.  My husband and I, like many others, are living on our RRIF and CPP.  Our RRIFs are in mutual funds with an insurance company and these funds lost 35 to 40% last February.  That’s when we panicked and got out.  The remainder of what’s left of our money is now in Money Market and Bond  mutual funds.  Do you have any advice to give those of us (who probably expect to live another 10 years) as to how to allocate our assets?  Thanks for any help you can give.

Dianne

Hi Diane,

From what you have told me you are at least 71 years old which is the age that you have to begin to wind up your RRSP and convert to a RRIF. The allocation that you have now is very conservative and frankly at your age it should have been in place before. I have said many times that the only senior who should be invested in stocks is Warren Buffet.

Now I say that because when you are older there is a less time to make up for losses and usually the capital  you have invested is providing supplemental income to support your retirement lifestyle.

But none of that helps answer your question of what to do now. My guess is that at this point you want to find some way to recover your lost principal as quickly as possible. 

One  thing you could think about is to use a variation of the barbell strategy where you combine long term assets such as bonds and very short term assets. Now the variation is that instead of using money market funds for the short term portion of the investment you trade higher risk stocks. We often say that if you can’t afford to wait you have to speculate.

The implication of using a variation of the barbell using a trading strategy is that you allocate the bulk of your assets into safe investments while ramping up the risk on a smaller portion in an effort to grow the smaller pile sufficiently to replaced the lost capital.

Given that your assets are now invested in mutual funds with an insurance company you might want to consider using say a small cap fund for the smaller growth portion of your portfolio.

Another consideration is to see how you might make use of the new Tax Free Savings Account to generate tax free gains. Under RRIF rules you have to start withdrawing capital so that the government can start collecting its deferred taxes. You are allowed to invest $5,000 a year into a TSFA . Do some calculations as to how much you can withdraw at the lowest possible tax consequence and make use of the tax free provision of the TSFA for the growth strategy implied with a variation of the barbell. You can even use the TFSA to generate tax free income from more conservative investments like bonds.

Make it a great Summer Diane and Happy Capitalism!

Lou,

I am self employed and am thinking of taking my CPP at 60. I plan to put the $ in an RRSP. After the CPP starts I can return to work at full pay 1 month after my pension starts. The pension will be about $200 per month
less. Do you think this is a good idea?

Dale

Hi Dale,

I honestly don’t see the rationale for taking these steps. By taking your CPP before age 65 you will knock down the payment stream over the course of the rest of your life. I assume that is what you meant by getting $200 per month less.

The idea of going back to work while collecting your pension will subject the new money to your current tax rate further reducing the disposable income from the pension. Then taking the after tax dollars and contributing to a RRSP will generate a tax rebate for the contribution but you will start paying tax on the money when you start taking the money out.

I would say a better route to take over the next five years would be continue workingand  collect your CPP at age 65 when you get the highest payout. If you want to make RRSP contributions do so out of free cash flow if you want to reduce your current tax bill. Another thing to consider is using a Tax Free Savings Account. You can contribute $5,000 a year and all the income and growth from your assets in the account come out tax free.

Happy Capitalism!

The idea with the RRSP is to build a portfolio of assets, feed the cow, and then draw down on the pool, milk the cow, at a time when your income is lower and the tax hit on the drawings are reduced.

Dave from Peterborough, Ontario writes about his RRSP:

Good morning Lou,

I listen to you so much on AM640 that I feel that I know you.

I understand what people say about not pulling your money out of your RRSP and I agree with that.

First of all, let me tell you that I am 52 years old. My question to you Lou, is should I keep putting money into them or would that money be better used against my line of credit which is major until things turn around?

Thank you for your time Lou and your answer in advance.

Dave

Hi Dave,

Thanks for this question. Its one that comes up often and I even address it in my Introduction to Finance classes at Sheridan Institute.

The virtuous circle when it comes to personal cash management is to contribute your maximum to your RRSP then take the tax rebates and use it to pay down debt. In your case it would be the line of credit.

Let me walk you through a simple example. Lets assume you are in the highest tax bracket which for this exercise we’ll say is 50%and you are allowed to put $10,000 into your RRSP. By simply putting the $10,000 into your RRSP you will generate a $5,000 tax rebate which you can then use to pay down your line of credit.

In effect you have turned $10,000 into $15,000 by making the right choice. If you had paid down your line of credit you would have missed adding $5,000 to your free cash flow. After you have paid off the line of credit and assuming you have paid off the mortgage then sock the $5,000 tax rebated into a Tax Free Savings Account which is a further extension of the virtuous circle.

This is a simple example so you are best to run through the numbers with your accountant. The idea with the RRSP is to build a portfolio of assets, feed the cow, and then draw down on the pool, milk the cow, at a time when your income is lower and the tax hit on the drawings are reduced.

If you are uncertain as to where to put your savings in these turbulent times, remember you can always hold the contributions as cash or a GIC. Not very exciting but in these markets are we looking for more excitement?

Happy capitalism!

Lots Of Noise

Hey Lou,

I’m an avid listener of AM640, and enjoy listening to your business views on general topics that are brought forth by the hosts.  I always hope to hear some daily tips, so you can be the driving force helping people spend some more money in our economy.

I’m approaching 30, have already invested in a place to live, and need to repay my HBP back slowly. I guess an optimistic person like myself can say, it’s a great time to re-invest the money into my RSP’s, since the funds are soo low right now, I’ll be able to earn a decent return.

The risk taking side of me wants to know, as the American markets try to recapture their losses, what types of funds will most likely (based on trends after a recession) provide me with an above average positive return. Equity? Dividend? Latin American Growth? Resource? Precious Metals? I’M LOST HERE LOU! PLEASE HELP ME OUT!!

Christian

Hi Christian,

There is always the question of how to proceed in uncertain times. Given that you have to put money back into your RRSP from the Home Buyers Plan withdrawal you made you should take a conservative approach.

Make the contribution into a money market fund and spend the next while researching which area you are most comfortable with. I also advise just contributing cash during the RRSP season when people are shoveling their money into funds without thinking. Once you have a sector or two that you are comfortable with then you can begin allocating money to them.

Take an averaging approach. A monthly contribution to the selected areas allows you to make 12 purchases over time which provides some balance. If the market is moving in an uptrend you can accelerate the buys. If they are in a downtrend you can slow down the purchases.

I think that current market conditions suggest that capital preservation would be a better objective than chasing a return. Yes markets are low but there is still a ton of risk out there that has to be dealt with. There were comments out today suggesting that there could be a second wave of the credit crisis if the stimulus package isn’t big enough.

Positive Signals In The Chart

Having said all that if I had to pick a sector at this point in economic history it would be precious metals. The US is about to rack up trillions in spending to try and dig its way out of this mess and that will put pressure on the green back.

The chart for gold shows a golden cross about to occur which is a bullish pattern and a sign of upward momentum.

Happy Capitalism!

Nigel from Mississauga, ON, writes about his LIRA taking a licking:

I am presently on my second career and have my first pension in a LIRA (Locked-in Retirement Account).  I have about 15 more years to work if all goes well.  Like others my LIRA has declined 40% in the last year.  It is invested at 70%-Canadian equity,16% US equity, and 14%-global equity.

Am I better to let it ride for the time being or make a move to attempt to stem the flow, if so what would you suggest based on the new regime in the US.  There is talk of huge investment into infrastructure perhaps this is an avenue to explore??

The TSX Composite must hold these levels

Hi Nigel,

In my experience if you are uncertain as to how to proceed stop and look for signs as to where you are and which way you are headed. You clearly are uncomfortable and that is when I advise as I have many times to go to cash. Yes you will pay commissions to get out but that’s the end of the that sinking feeling in the pit of your stomach.

The chart shows the TSX Composite building support in the 8,400 level. There is resistance at 10,000 if it breaks through this resistance it runs to 12,000 without much to stop it.

The MACD is signaling an upturn but thats not a guarantee.

Breaking Above Resistance

As far as infrastructure I`ll use SNC Lavalin as a proxy.  It looks like the stock has bottomed and is moving through resistance at the 200 day moving average. From a strategic position yes infrastructure looks to be a good place for capital not just in Canada but globally.

Make sure to watch the charts of your funds or stocks every day to confirm that you want to continue to own them. If you ignore your money it will go away.

Happy Capitalism!

As a senior and a widow since 1980, I had invested in mutual funds, stock (Potash for one) and a GIC or two.  Not much.

I have lost much and am very frugal with a Honda Accord 1990 (224,000 kilometers) and only consume what I  need and can afford.

So, is it rude of me to ask what the best investments would be, beside slipping this under the mattress. I think you are great and listen to you religiously.

Thank you, Lou

Hi Nina,

Thanks for your support it, is very much appreciated.

As a senior I would say that you should have the majority of your assets in Government of Canada Bonds. When we are no longer earning income from employment we have to make capital preservation the top priority in our financial plan.

What capital you have should be used to generate additional income to supplement your pension income.

You could look at other fixed income vehicles such as provincial bonds, corporate bonds, preferred shares, and dividend paying common stocks but as the yield goes up so does the risk.

Sorry I can’t give you more direction in the area of stocks but its my firm belief that the only senior who should be buying common stock is Warren Buffett or a very seasoned trader.

Happy Capitalism!