It's Your Money  

RRSPS in a pandemic year

We are five weeks away from the annual RRSP deadline.

Much like in years past, you can expect a few of my upcoming columns to focus on this program.

This year’s Registered Retirement Savings Plan season might be different though because like most thing in life, the pandemic is causing many people to make some changes.

To be clear, the financial rules around the program haven’t changed. Money invested into an RRSP creates a tax deduction at the time of contribution and money withdrawn from an RRSP in retirement is taxable.

What will change for some people this year is their decision to put money here versus a Tax-Free Savings Account (TFSA).

There has been much written over the years on RRSPs versus TFSAs and the pros and cons of investing in each. For most people, using a combination of the two makes sense.

Money invested in a TFSA does not attract a tax deduction when deposited, but money withdrawn is not taxable making it an easier place to pull money from if needed on a short term or emergency basis.

But does that same invest-in-both strategy work this year with everything going on?

For some, I’d say it still does.

If you have been earning a steady income and you don’t feel that your job is at risk in the COVID economy, you likely still want to put money into your RRSP as part of your long-term retirement savings.

In fact, many of those earning a good income right now are stuck at home and finding less ways to spend their money so this could be the year to load up on your RRSP more than normal if you have the contribution room.

You don’t need to use the full tax deduction for the 2020 tax year – instead you can carry some of it forward to save taxes in future years as well.

However, if you are one of many Canadians who have been financially affected this year you may want to reconsider your regular annual RRSP contributions.

While I would normally never advise people to skip a year, missing your regular contributions for one year won’t have too damaging an effect.

Instead, that money earmarked for your RRSPs might be better off in your TFSA this year.

You’ll miss out on the tax deduction and potentially even pay more in taxes overall, but the money will be more accessible if you need it for an emergency or to cover your bills if you are off work for awhile.

Low-income earners are almost always better off putting money into a TFSA since the tax credit from an RRSP contribution will be smaller.

If your finances are ok overall but you’re still worried about potential setbacks in the coming months, you could of course put some of your designated savings in each type of account to balance out the risk and benefits of each option.

Like most other money decisions, a proper financial plan can help answer what action plan is the right one for your unique situation. There is still plenty of time before the March 1 RRSP deadline to do your homework and make the right choice!

Habits of millionaires

Although it may be hard for some people to retire on one million dollars these days, the simple idea of being a millionaire lives on.

That got me thinking. I deal regularly with many clients who have $1 million or more of investment assets and it would be interesting to see how they got there.

What common habits do they have and what sets them apart from those who have less than that saved?

Here are the common habits that I compiled.

They take care of themselves – Most millionaires surveyed exercise regularly, eat healthy and set health-related goals that they follow through on.

They read for self-improvement – Reading can help people learn and grow. Research on this found that 85% of self-made millionaires read two or more books a month.

They avoid debt as much as possible – Many live a frugal lifestyle and only make purchases that they can pay for in cash today. Avoiding a purchase that will incur interest payments is their top goal.

They don’t act rich – Research found that most prestigious cars are actually driven by people who are aspiring to reach financial security and not those that are already there. Most wealthy people surveyed were driving non-luxury brands.

They are willing to spend money on education – For themselves, their children and even grandchildren, they understand the value of education and how it relates to wealth building and are willing to invest in education whenever possible.

They avoid supporting their adult children financially – While this may sound harsh if they have the means, most self-made millionaires know that financially supporting adult children will only make it more difficult for them to succeed on their own. Avoiding large gifts is equally important.

They create multiple streams of income – Not willing to rely on a single source of income, the average millionaire diversifies their sources to better handle economic downturns as well as further grow their wealth.

They don’t spend hours managing their investments – Most millionaires have at least a portion of their wealth in the stock market, but you won’t find them buying and selling regularly. The majority will buy and hold investments for many years to allow them to grow through market cycles.

They are entrepreneurial – Self-employed people are four times more likely to be millionaires than those who work for others. Like it or not, those that are willing to take on these risks are the same ones with higher net wealth.

They’re patient – Understanding that most get-rich-quick schemes don’t work, they build their wealth over time and avoid living beyond their means to reach their goals.

How do you get there yourself?

I hope you’re practising some of these habits already, but if not, choose three to five habits you believe will benefit you the most and plan to make them your own.

Keep incorporating more of these habits over time to reach your long-term goals.

2021 economic outlook

As we head into a new year, many wonder what is in store for markets.

2020 brought a major market pullback in the spring, but then an equally strong and quick recovery followed by sustained growth into year end.

Most major indices (Canada excluded yet again) finished the year quite strong and the U.S. technology stocks posted some remarkable gains.

But with all of this growth already taken place, can the bull market continue?

The year ahead is shaping up to possibly be an extraordinary year for investors, as a uniquely bullish environment takes form.

Driven by the promise of successful vaccines, the global economy looks set to experience a broad, synchronized recovery in 2021.

As vaccine deployments drive economic re-openings worldwide, activity will be boosted by pent-up demand.

Corporate earnings, already back to pre-COVID levels in many countries, will push to new highs.

Economies will feel the lagged impact of massive global monetary stimulus and, in many cases, additional fiscal stimulus.

With central banks anchoring benchmark interest rates near zero, risky assets like stocks and bonds will continue to find valuation support.

Higher demand will lift prices of commodities tied to economic growth (for example, oil and copper) and likely weaken the U.S. dollar.

Sure, there are risks of speed bumps along the way - most notably a surprise delay in vaccine deployment - but 2020’s unprecedented global economic shutdown has set the stage for what may be an unprecedented recovery.

As a wave of hopeful vaccine news emerged in the closing months of 2020, the Organization for Economic Co-operation and Development (OECD) said the global economy was turning a corner and would improve in 2021.

The OECD now sees global growth of 4.2% for the coming year. Even without the availability of vaccines, many countries are already seeing improved economic momentum.

China, the first major country to impose and then lift restrictions, was early in returning to strong growth that has lifted others in its supply chain (for example, Taiwan and South Korea) and export-oriented countries around the world (such as Japan and Germany).

In a synchronous recovery, all regions are expected to see solid gains, especially some of those that were hit hardest by the pandemic.

Investor optimism had already stepped higher in early November with the declaration of Joe Biden as president-elect in the U.S., which removed much of the political uncertainty that weighed on markets in 2020.

Less than a week later, markets began receiving steady doses of good news on vaccine progress. The wave of hopeful news sent several stock benchmarks to all-time highs, which were broken again just last week.

The prospect of a faster “return-to-normal” is the confidence-booster that will encourage increased labour force participation, unlock pent up demand in areas such as travel and entertainment, and lift growth worldwide.

The year may get off to a slow start because of surging COVID cases and renewed restrictions. Gains in employment and other measures were coming at a slower pace as 2020 ended. Europe may even see a double-dip recession.

However, effective vaccines are expected to accelerate growth by the second quarter.

Already, the expectation of better growth has caused the U.S. dollar to collapse to a 2-½ year low versus other major currencies.

Copper has climbed to its best level in seven years and West Texas Intermediate oil (WTI) to its highest price since last February.

Oil will likely continue to see a gradual rise, moderated by the measured easing of output cuts that the Organization of the Petroleum Exporting Countries implemented last year in the wake of the COVID related collapse in demand.

As growth accelerates, most major central banks have indicated they will remain on hold for the foreseeable future. Officials at the U.S. Federal Reserve were early in suggesting they are willing to let inflation run a “little hot” for a while to ensure the recovery doesn’t falter.

Rising inflation expectations (if not actual inflation) will lead to some upward pressure on longer-term bond yields, steepening yield curves.

By early December, the yields on 10-year Government of Canada bonds and U.S. treasuries rose to their highest levels since last March.

However, most observers think the upside to yields is limited, and that, considering the massive amount of debt that was issued in stimulus efforts, central banks would step in to stop rates from rising so high that they “blow up” federal budgets.

As always, there could be some new and yet-unknown event or crises that appears this year that alter the above predictions.

But the way global economic affairs sit today, it looks like 2021 could be a great year of growth and hopefully, better health for all too!

Don't let greed guide you

The new year typically brings the same investment timing questions each and every year:

  • Should I wait until the end of February deadline before putting my RRSP contribution in?
  • Should this be the year I switch to regular monthly contributions?
  • Should I put money into my TFSA now or wait for a market correction?

While there is no doubt that timing contributions at just the right time can add significantly to investment returns, it is difficult to do once and near impossible to pull off repeatedly.

The brightest investment minds in the world regularly make bad calls so why does the average investor think they can do better?

Attempting to time the markets and avoid pullbacks more often lead to missing out on significant advances since they occur quite often at unexpected times.

The key to successful investing is actually quite simple – you need the discipline to stay invested and understand that it is time in the markets, not timing the markets, that creates most wealth.

U.S. large cap stocks returned more than 500%  between the low of March 2009 and the high in February 2020, and history has shown this is the norm and not the exception.

Major market events that felt quite serious at the time including the 2008 “great recession,” the bursting of the dot-com bubble, the “Black Monday” event in 1987, and now the COVID correction of 2020, look like minor blips in long term market charts.

With the odds so overwhelmingly in favour of gains, why do so many investors fight those odds trying to time the market?

In my opinion, it all comes down to two basic human emotions – fear and greed. Allowing these two emotions to steer your investment decisions can be dangerous and costly… 

As we start a new year off in times that are very much uncertain, do yourself a favour and don’t think too much about when to put your hard-earned money into your investment accounts.

If the money is earmarked for long-term savings, put it into your account and forget about it.

Or better yet, set up automatic monthly contributions to your RRSP and TFSA accounts and resist the urge to change them. 

While the timing of the next downturn is hard to predict, staying on the sidelines looking for an optimal entry point usually results in missing out on the biggest market gains.

What is predictable is that markets will continue to advance over time.

Accept that market volatility will always exist and let time be your friend.

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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