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Next to NHL hockey—remember that?—the most popular Canadian pastime is complaining about the federal government. But amid volleys of brickbats aimed at the sponsorship scandal, leaky submarines, and similar targets, permit me to offer a kudos for something the federal government did in 1957, when it introduced the Registered Retirement Savings Plan. It was, quite simply, brilliant.
Back then, retirement planning meant either working for a company that promised an income after thirty or forty years of employment, or you produced enough kids to steer you through your dotage. There wasn't much else.
Well, things have changed. These days, by the time we retire we're often older and healthier than the corporations we depended upon for a pension income. In that case, you'd better have a fat RRSP.
The appeal of the RRSP is that it delivers both short-term gratification and long-term security. Kinda like marriage. Short-term gratification arrives as a tax rebate: slide $1000 into an RRSP and, if you are in the 50 percent marginal tax bracket, Ottawa slips $500 back into your pocket. Cynics point out that the $500 was yours to begin with, but let's not quibble—anytime the tax people switch from opening your wallet to opening their own, take advantage of it.
The money in your RRSP is free of tax until you remove it, which can be as late as age 69. At that point, your RRSP must be converted to a Registered Retirement Income Fund, from which the government insists that you withdraw money each year. This becomes taxable income, a phrase that sets the income tax elves giggling and rubbing their hands in glee, but let's not dwell on that picture for the moment.
Key question: What do you do with the cash in your RRSP so it delivers the growth you need for long-term security? Many Canadians leave it mouldering in a savings account paying 2 or 3 percent interest annually. This helps them sleep soundly. So, of course, will a head injury. Forget a savings account. You need growth.
Others feel the spirit of Donald Trump at their shoulder. The faster their RRSP grows, they realize, the sooner they'll be sailing the Caribbean in a yacht the size of Prince Edward Island, and they begin buying shares in Nepalese yak farms and Madagascar gold mines. They have confused their RRSP with a slot machine.
Between these extremes is the familiar Canadian middle, balancing risk against reward, maximizing the latter and minimizing the former. That's where most people should be. But they need help to get there.
Help is provided by the investment industry, usually a bank-owned brokerage. If you are a loyal customer with an RRSP value of five figures or more, you'll be referred to a financial advisor or registered representative or broker. He or she may be a vice-president, but don't be impressed—the investment industry produces vice-presidents the way barn cats produce kittens, although the technical details are somewhat different...
Inexperienced RRSP investors need advice when selecting investments to grow their RRSP and when choosing the person to provide that advice. The way I see it, the average seven-year-old child knows more about sex than her grandparents know about investing. With almost $500 billion sitting in their RRSPs, Canadians need a greater understanding of basic investing principles. Most of all, we need financial advisors to provide smart answers to dumb questions. The dumb questions include:
- Why are you recommending this investment?
- How does it fit my needs?
- How long should I keep it, and why?
- Do you have this investment in your own portfolio?
S ome of the most successful people I know are quick to admit when they don't understand something and refuse to make a decision until they do. That's the central message in The Naked Investor. Learn what you don't know. Be smart enough to ask the dumb questions. Choose an advisor carefully and always cut the cards. Finally, never forget whose money it is, and who plans to walk on a warm beach through the cold winters of their retirement.
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