Making the right investment choices?
One of the essential fundamentals of any financial plan is an investment portfolio. But given the many investment options available to you, how do you make the right investment choices –
choices that will support your short- and long-term financial goals? People generally can plan for months for a 2 week vacation, but retirement will be the longest vacation they’ve ever had. They never get around to thinking about it and continue to avoid putting any consideration for it…. which may lead to an almost impossible situation. There is no one-size-fits-all answer to that question – your answer will be unique to your needs, goals and expectations – but there are some general guidelines that can help aim you toward the right investment choices for you.
First, let’s take a quick look at why any investment choice is almost always a complex issue.
The question Should you invest in investments that are Registered Retirement Savings Plan (RRSP) eligible, or Tax-Free Savings Account (TFSA) eligible or both?
The answer Both RRSPs and TFSAs provide the benefit of tax-sheltered compound growth for investments held inside the plan. But RRSP contributions are tax-deductible and TFSA contributions are not, although amounts can be withdrawn tax-free at any time and the withdrawn amounts added back to your TFSA contribution room.
Generally speaking, RRSPs are the investment of choice for long-term objectives while a initial contributions to a TFSA may be better suited for shorter-term goals, such as an emergency fund or saving for a major purchase, like your home.
There’s more to consider here, but you get the point - what seems like a simple investment choice turns out not to be so simple after all. Still, here are a four basic questions that, when answered from your personal perspective, can help you focus your investment choices.
1. What are the tax implications of the investments? Not only are your RRSP contributions tax deductible, all other taxes on your registered investments are deferred until money is withdrawn during retirement at which time all redemptions, including the amount contributed will be fully taxable. On the other hand, if you believe you are in a good pension plan, after you have satisfied your short term goals in the TFSA, it is a good idea to invest remaining funds at your risk tolerance since this is a tax free growth plan. After maxing out the TFSA, you can put remainder in your non-registered investments, which will attract taxes upon redemption but at the tax preferred rate. That’s why it’s usually a good strategy to place tax attracting investments inside registered plans and investments that enjoy a preferential tax treatment in your non-registered portfolio.
2. Will I be able to sleep well at night? You’ll need to evaluate your time horizon and your tolerance for risk. Younger investors may be willing to accept more risk and decide on a more aggressive portfolio; older investors typically opt for less volatile investments that deliver steady returns. Asset allocation and diversification are always important – but the essential rule is to pick the asset mix that lets you sleep soundly at night.
3. Am I confident I will have enough income to fund my retirement dreams for all the years of my retirement? You’re likely to live a long time in retirement. Assess all your sources of income and make investment adjustments as required to be assured that your income will last as long as you do.
4. Do I know what my financial legacy will be? Decide what you want to pass on and to whom – and then take the right steps to ensure that’s what will happen in the most tax efficient way.
You may have the financial skills to put your own investment and financial plan together but why gamble with your future? Your professional advisor can help you make the best investment
choices and keep them on track as time goes on.
John Scholl B. Mathematics, CGA, Consultant - Investors Group Financial Services Inc.
Wealth Management & Financial Planning
Phone: (905) 450-2891 X529 Toll Free: 1 (866) 799-2223 x529 Cell (416) 731-3660