In focusing too much on market risks and investment returns, retirees commit avoidable mistakes
Many people only understand investing as if it were like gambling: place money in the right investment vehicle at the right time, and you’ll reap returns from price gains and dividends. But in reality, investors — specifically retirees — are making mistakes by focusing too much on market risks and returns.
One example is fixating on dividends, which can expose investors to sector concentration risks and other weaknesses. But aside from that, dividend strategies may not be ideal from a taxation perspective. “[I]n a taxable non-registered account, capital gains are only 50 per cent taxable and tax is only payable once capital gains are realized,” said CFP and tax professional Jason Heath in a recent piece on the Financial Post. “Dividends, on the other hand, are taxable every year as an investor receives them … although at low levels of income, Canadian dividends may be taxed at a lower rate than capital gains during a given year.”
Holding stocks for too long is another pitfall. By letting one stock grow too large in taxable non-registered accounts over a long time, investors may get exposure to a significant capital-gains tax liability. They may then end up holding the investment longer than they really want, or it could take up a bigger share of their portfolio than they want it to. “Seeing as how capital gains will need to be realized eventually … a strategic realization of capital gains may be better than indefinite deferral,” Heath said.
Another mistake is drawing from one’s RRIF too late. Delaying RRIF withdrawals until age 72 isn’t always the best option, according to Heath, particularly for those who retire early. “RRIF withdrawals are fully taxable and if a retiree has a low income in their 60s, but a high income in their 70s, they often end up paying more lifetime tax by deferring their RRIF withdrawals,” he said.
Retirees may also start drawing from their CPP and OAS pensions at age 65 to avoid drawing down their investments. But as Heath pointed out, CPP and OAS can be put off until age 70, increasing one’s pension entitlement by 8.4% and 7.2%, respectively — which could be critical for those expecting to live well into their 80s.
People also tend to misuse their TFSAs by loading it with too much cash instead of investments. Forgoing TFSA contributions in retirement could also be a mistake, Heath said, when an investor has non-registered savings they could shift into their TFSA each year to make their annual contribution.
Finally, having the same asset allocation across all accounts may not be the best strategy. According to Heath, different factors have to be considered, such as:
Related stories:
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Canadian investors regret inadequate retirement savings
One example is fixating on dividends, which can expose investors to sector concentration risks and other weaknesses. But aside from that, dividend strategies may not be ideal from a taxation perspective. “[I]n a taxable non-registered account, capital gains are only 50 per cent taxable and tax is only payable once capital gains are realized,” said CFP and tax professional Jason Heath in a recent piece on the Financial Post. “Dividends, on the other hand, are taxable every year as an investor receives them … although at low levels of income, Canadian dividends may be taxed at a lower rate than capital gains during a given year.”
Holding stocks for too long is another pitfall. By letting one stock grow too large in taxable non-registered accounts over a long time, investors may get exposure to a significant capital-gains tax liability. They may then end up holding the investment longer than they really want, or it could take up a bigger share of their portfolio than they want it to. “Seeing as how capital gains will need to be realized eventually … a strategic realization of capital gains may be better than indefinite deferral,” Heath said.
Another mistake is drawing from one’s RRIF too late. Delaying RRIF withdrawals until age 72 isn’t always the best option, according to Heath, particularly for those who retire early. “RRIF withdrawals are fully taxable and if a retiree has a low income in their 60s, but a high income in their 70s, they often end up paying more lifetime tax by deferring their RRIF withdrawals,” he said.
Retirees may also start drawing from their CPP and OAS pensions at age 65 to avoid drawing down their investments. But as Heath pointed out, CPP and OAS can be put off until age 70, increasing one’s pension entitlement by 8.4% and 7.2%, respectively — which could be critical for those expecting to live well into their 80s.
People also tend to misuse their TFSAs by loading it with too much cash instead of investments. Forgoing TFSA contributions in retirement could also be a mistake, Heath said, when an investor has non-registered savings they could shift into their TFSA each year to make their annual contribution.
Finally, having the same asset allocation across all accounts may not be the best strategy. According to Heath, different factors have to be considered, such as:
- Which accounts the investor will be drawing from
- When the ideal time to determine asset allocation is
- Where it’s better to hold more conservative investments
- Tax efficiency considerations for different types of investment income
Related stories:
Why debt is a prevalent retirement risk
Canadian investors regret inadequate retirement savings
