I’ve outlined a new model to build wealth for retirement that can withstand even weak periods of growth and poor markets. This new model relies on using investment funds that perform well in good markets and retain value better in poor markets. The steps below also outline the key strategies for maximising investment growth and retirement income.
Curious how your investment portfolio stacks up? I encourage you to read the steps below that outlines a select group of investment funds and the new retirement model.
STEP 1: Own investment funds that offer consistent growth, even when markets fall.
Since 2007, there have been five periods of negative returns on the S&P/TSX (Toronto) that exceeded 5%. Most equity (stock) funds move in the same direction as the index. There are a few, however, that correlate less to the markets and resist the negative movement of the markets. Similar trends exist for the U.S. and global markets. Consider that $10,000 invested in 2006 in a typical investment portfolio of 70% equities to 30% fixed income could have yielded an additional $10,718 in a consistent growth portfolio as opposed to just $4531 in a standard portfolio.
STEP 2: Contribute to investments on a regular basis instead of annually.
When we make systematic monthly or bi-weekly contributions to an investment plan, we buy securities at both high and low prices. Over time, it has been proven that the average cost ends up lower, resulting in higher overall gains. This is called dollar-cost averaging.
STEP 3: Leverage the tax-free power of your Tax-Free Savings Account (TFSA).
We all understand the value of using an RRSP for tax-sheltered growth. However, too many Canadians continue to use their Tax-Free Savings Accounts for short-term savings, instead of long-term investing. By contributing your tax refund generated by your RRSP contributions into your TFSA, you create far more wealth than using your RRSP alone. In our analysis, it yielded a whopping 44% more wealth than using the RRSP alone. A monthly amount of $500 deposited resulted in an extra 1.13% extra in our analysis.
STEP 4: Allocate investments in a tax-efficient way for greater after-tax value.
The growth in a Tax-Free Savings Account is never taxed; therefore, investments with greater growth potential should be held in your TFSA, while tax-inefficient investments, like fixed income (bonds) should be held in your RRSP.
STEP 5: Use whole-life insurance to diversify and amplify retirement income.
Whole-life insurance adds an investment component that provides tax-efficient growth within the policy. When left to grow, the investment account offers an additional source of income over RRSP’s, TFSA’s and non-registered accounts. The tax-efficient growth within the whole-life policy may also provide greater value over investing alone over the long-term. Allocating $100 a month from our hypothetical $500 a month retirement plan to a whole-life policy yielded little benefit over the 10 years between 2006 and 2015. However, when we extended the model an additional 10 years repeating the same growth pattern of the investment funds and whole-life policy, the improvement in after-tax assets became more substantial.
How does this model compare to your current portfolio?