Over the last few years, there has been a growing trend of utilizing ‘robo-advisors’ in the industry. If you are unfamiliar with the concept, essentially there is very little to no human contact when handling your investments. Your investments are all completed online or on your mobile device, where you, as the client, answer questions and you are placed into a pre-built portfolio based on an algorithm. One of the main advantages of a robo-advisor is the lower fees associated with these accounts. Paying less is always great, but does that mean robo-advisors are right for your needs?

When it works

There is a subset of the population for whom investing with a robo-advisor works perfectly. If you fit into this population, take full advantage of the platform and start saving for the future. 100% fee-focused and want to pay less fees on your investments, this is a good option for you. Have a firm grasp on the general investing principles, the stock market and how investing works, this is a good option you. If you are just looking to get your “feet wet” and start looking at investing, this could also be right for you. There may be a few other situations where robo-advisors could be the right fit for you, but typically these subsets are the ones that benefit from robo-advisors the most.

When it does not work

There is a larger subset of the population where robo-advisors are likely not the right fit. For example, if you have a difficult time understanding investing or you don’t feel comfortable with investing, stick with an advisor. If you have complex plans, such as owning a business, retirement or being as tax-efficient as possible, working with an advisor is going be of greater benefit for you. Lastly, if you are looking for someone to provide help, guidance and a personal touch, do not go with a robo-advisor. There are numerous comments on Reddit that speak to outages, long wait times with different robo-advisor firms. Lastly, there is limited human contact, so you need to feel confident doing it 100% on your own.

Do the fees really matter?

Lastly, many of these robo-advisors market lower fees and saving you much more in retirement because you pay less. It is really hard to validate this, particularly when you can’t compare a robo-advisor’s portfolios to a financial advisor’s portfolio; it is like comparing apples to oranges. The thing to remember with financial advisors is that we work for you as the client and the fees you pay are for the service we provide. Similar to a furnace maintenance plan, you pay monthly instalments to get free annual service. If you didn’t pay for this, you wouldn’t get the free annual service. An advisor should be providing a service to you and supporting your needs. If your advisor is not doing this, maybe it’s time to look at your options and determine which one will provide a greater service then what you are currently getting.

Maintaining your income and outliving your income are two of the biggest concerns for people in retirement or who are about to retire. Investing in the markets can be emotional and can erode your retirement income faster than expected. We are going through a large dip in the market, the second one in 12 years, and it is not known when the markets will rebound. For young investors, this is not as large of an issue, as they have years to regain any losses; however, for those in retirement or who are about to retire, every year counts.  In this low interest rate environment, utilizing Guaranteed Income Certificates (GICs) alone is not enough and adding more investments to your portfolio may not yield the expected results.  The good thing is, there are some other options available to secure your money in retirement.

Guaranteed Minimum Withdrawal Bonus (GMWB)

With a guaranteed minimum withdrawal bonus, your investments will generate a guaranteed income for life regardless of the market conditions. A GMWB is an investment product within a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or Tax-Free Savings Account (TFSA) that provides that guaranteed income. With each account mentioned above, you still invest the money in the market according to your risk tolerance.

With a RRSP and TFSA, your initial deposit predicts your monthly income in retirement. As your investment account grows over time, so too does your guaranteed income. If your investment account goes down over time, your income base will still increase until you are ready to retire based on the income bonus base.

In the case of a RRIF, your initial deposit sets your guaranteed income in life. If the markets go up, you have the option of withdrawing the additional funds without disrupting your guaranteed income level. If markets go down, your income level is still guaranteed, based on the initial deposit, for life.

Annuities

Similar to GMWBs, annuities give you guaranteed income for life. With an annuity, you are purchasing guaranteed income for life with your initial deposit from an RRSP, TFSA or non-registered account. The amount of income you will receive will depend on the initial deposit amount, your age, interest rates, and the guarantee periods. Guarantee periods ensure payments are provided to your beneficiary for a set period of time in the event that you pass away unexpectedly. You can also name a successor (secondary) owner, so upon your passing, the annuity will continue to pay out until their passing. This is a great way to ensure guaranteed income to a spouse, or even a child or grandchild at a reduced rate.

In these current market conditions, having guaranteed income leading up to or throughout retirement can relieve a lot of stress. Knowing that there will always be a predictable income stream can ensure that your retirement is everything you want it to be. Talk to your financial advisor about these options to see if they are the right fit for you.

During the high ups and high downs in the market, investors always need to ensure that they are properly positioned. You should always be thinking a few steps ahead of the market changes you see today; this is where rebalancing comes into play. During times of volatility, portfolios can shift one way or another, causing changes to the risk profile and the target asset allocation. The target asset allocation is the balance of bonds to equities in an investment.   As a result of the COVID-19 market changes, many investors are seeing their portfolios shift to a more conservative allocation

Rebalancing restores your target asset allocation

Rebalancing is the process of periodically comparing your original asset allocation to the current portfolio breakdown. If the holdings are outside of your threshold level, it may be time to rebalance your portfolio. When you rebalance you shift a portion of your portfolio from equities to bonds or vice versa. Think of this like loading a delivery truck, at the beginning each side has equal weight. However, if boxes are loaded faster on the left side, the truck becomes uneven. Moving some of the boxes from the left side to the right side will bring the truck back to balance. This is similar to what happens in your portfolio when the equities outperform bonds. This causes a greater proportion of equities in your portfolio than the target asset allocation. This now places the portfolio in a higher risk category and potentially increases the volatility of the investment.

Rebalancing during market volatility

The most ideal time to rebalance would be at the top and bottom of the markets, but knowing exactly where those are, only occurs after those events have already happened. During the current market downturn, portfolios likely have become more conservative, as equities saw a sharp sell-off. Being more conservative might be seen as a positive during these times, but it can also hinder your ability to quickly recover when the market rebounds. Rebalancing can be accomplished with the opportunity to invest new money in the market to increase your equity hold and effectively rebalance your portfolio at the same time.

Strategic changes to investments

Rebalancing is a natural opportunity to change up your asset allocation if you are not comfortable or confident in the current allocation. When life events happen, such as marriage, new job, or retirement is the other time asset allocations should be shifted to fit your needs. It is important to resist the urge to cut your losses and move your money to cash, as investing is long term and short term loses can be expected. Ensure you are reviewing your asset allocation with your advisor to ensure your portfolio is matching your risk.

Over the last few decades, you have been saving regularly and built up your retirement portfolio; now what happens? When should you take your CPP and OAS? How does a Registered Retirement Savings Plan (RRSP) change to a Registered Income Fund (RIF)? What is the effect on my retirement from a market downturn? These are just some of the questions you might have during this life event. Having a full understanding on how and when to collect your income is extremely important.

Taxes in retirement

One of the prominent factors in retirement is being as tax efficient as possible. Your pension plan, RIF payments, RRSP withdrawals, CPP and OAS are all taxable income. Some of these payments have taxes withheld at the source, such as with your RRSP or RIF. Other sources of income, such as your CPP and pension, will have to be set up to have taxes withheld to ensure you don’t owe any additional money at tax time. Splitting your CPP with your spouse can help lower your taxes by transferring money from the higher income earner to the lower earner. Tax-Free Savings Accounts (TFSAs) do not count as income and will not affect your OAS claw-back. Utilizing this account can help save you thousands in retirement as well as save for the future.

When to collect

Figuring out the best time to start collecting your income as well as which sources to withdraw from not only helps to save on taxes but can also ensure that your income lasts through retirement. In certain circumstances, collecting your CPP and OAS early might make sense depending on your sources of income. Or vice versa, it might be in your best interest to wait to collect your CCP and OAS, and instead use other sources of income to fund your retirement. If your pension has a bridge component, it might be smart to wait to collect your CPP until the bridge ends at 65.

Investing

With the most recent market downturn as a result of the coronavirus, many retirees are concerned about outliving their money. When you convert your RRSP to a RIF, the year you turn 71, you are still investing your money. With the changes to the investment world, keeping your money only in Guaranteed Income Certificates (GICs) is no longer a viable option for growth. Rather, to achieve the returns necessary to maintain your income, you need a mixture of GIC’s, bonds, and equities. Depending on each client’s situation, different mixes and proportions of GIC’s, bonds and equities are appropriate. Another method to help protect your income during market downturns is to use a “cash wedge” to redirect your RIF withdrawals from your equities to GIC’s.

There are many questions that need to be answered before and during retirement. The one thing you want is to be confident that your money is going to last your full retirement, even during the downturns. You also want to ensure that you are being as tax efficient as possible. Working with a financial advisor can help confirm that you are on track to live the best retirement possible. Don’t wait until you retire to speak to an advisor; act now and better prepare yourself for the future.

Choosing whether to invest in a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) is easier than you think. Investing every year is the key to creating assets and a good financial future. Monthly deposits using a pre-authorized contribution plan from your bank account or payroll deductions makes saving money easy. Contribution amounts can be increased over time to keep pace with inflation and maximize the contribution limits of your TFSA or RRSP.

TFSA

The TFSA has an annual contribution limit of $6,000 for 2020, and a maximum contribution limit of $69,500 for those who were over the age of 18 in 2009. The annual contribution limit is set by the government each year, and any unused contribution room dating back to 2009 or the year you turn 18 can be carried forward. One additional benefit is that you can redeposit money into the TFSA the year following a withdrawal.  The TFSA investments grows tax-free and the withdrawals are tax-free, meaning there is no income tax deduction for any deposits.

RRSP

The RRSP allows for contributions up to the annual limit as noted on your income tax assessment each year. Any unused contribution room is carried forward to future years but withdrawals are not added back to your contribution room. The RRSP investment grows tax-free like the TFSA; however, at the time of withdrawal, the full withdrawal amount is taxable. The RRSP has additional benefits, such as the Home Buyers Plan and the Lifetime Learning Plan. Each plan allows you to withdraw a set maximum amount for the purchase of your first home or for post-secondary education, respectively. The amount you withdraw is not taxable income, but it must be fully repaid back into your RRSP over time. If you do not redeposit the money, this withdrawal will be taxed to you as income over the years.

Investing

TFSAs and RRSPs are savings plans that can hold a variety of investments based on your personal risk tolerance and financial goals. Investments within a TFSA or RRSP can include GICs, mutual funds, segregated funds through a life insurance company, stocks, bonds, and Exchange-Traded Funds (ETF).  TFSAs are beneficial for most Canadians and funds from a TFSA can even be transferred or moved to an RRSP in the future if tax breaks are needed. RRSPs are most beneficial for Canadians who are currently in a higher tax bracket but will be in a lower tax bracket at retirement.

Final Thoughts

In an ideal world, both TFSA and RRSP accounts are maximized to benefit your retirement and financial needs. The key thing is to start saving now with a monthly contribution that fits your budget and your financial goals. A review with your financial advisor each year will ensure that you are still on track to reach your goals. Don’t leave investing to the last minute; take steps today to secure your financial future.