Chris Chapman spends most of his days meeting clients and leading strategy sessions with employees. But despite his busy schedule, he always makes time for his finances.
The president of Derailleur Consulting Inc., a Toronto-based business coaching and training consultancy, Chapman usually makes a lump-sum deposit close to tax time — about 15% of his gross earnings — mostly in a balanced portfolio of exchange-traded funds. “I let it ride for a year, and rebalance the distributions around tax time,” he says. “It isn’t sexy, but it appears to be working so far.”
Of course, Chapman says he could always do more. With taxes constantly chipping away at his income, and his cost of living seemingly rising every year, he’s always trying to find ways to save more and pay less tax. “I work with an accountant each year to look at what I want to accomplish and how I can do that in the most efficient way possible,” he says.
Most Canadians would likely say the same as Chapman: They’d want to save more if they could. Of course, with so many demands on our income, whether mortgages, car payments, education or more, that’s easier said than done, says Justin Ezekiel, Vancouver-based director of tax and estate planning for Sun Life Financial. Indeed, a 2018 study by a Canadian bank found that 53% of Canadians aren’t sure whether they’re saving enough for retirement. “Most people are not saving enough for retirement,” Ezekiel says. “They plan to work well into their sixties and beyond in many cases.”
Whether you’re already saving money or need to get started, there are ways to maximize your savings. Here are a few strategies to consider.
Automate your savings
The best long-term savings vehicles are still the registered retirement savings plan (RRSP) and the tax-free savings account (TFSA), but only about 65% of Canadians use one or the other, according to Statistics Canada. The problem is that people tend to invest in these accounts with a lump sum once a year — and it’s easy to miss out if that’s your approach, financial planners say.
Itʼs better to set up monthly or bi-weekly deposits, where money is automatically taken out of your chequing account and invested into an RRSP or TFSA, says Jason Heath, a Toronto-based, fee-only financial planner. This approach guarantees that you’ll save. “Automating your investment is an important strategy,” Heath says.
It’s also important to think about which account to use. RRSPs are well-suited for people in a higher tax bracket who expect to withdraw retirement funds when they are in a lower tax bracket, Heath says. If you earn $30,000 or less, you’re typically advised to use a TFSA to save.
“If you’re in a low tax bracket when you contribute, it may be that your tax bracket in retirement will actually be higher,” he says. “Generally, if someone has a fairly low or moderate income level, a TFSA may be a better option.”
Owning dividend-paying stocks can also help provide some additional savings. The money they distribute can either be taken in cash — and used to cover day-to-day expenses — or reinvested in more stock, Ezekiel says.
If you had invested in the S&P/TSX composite index over the past five years, you would have received a 26% return. If you owned shares in all the companies in the index and accounted for all their dividends, you would have been up 41%, according to TMXMoney.
Dividends received from publicly traded Canadian corporations and held in non-registered accounts are also taxed more efficiently than regular income, thanks to the dividend tax credit.
“If you earn no other sources of income, you can earn just over $50,000 in eligible dividends tax-free in certain provinces,” Ezekiel says. “While this is an unlikely scenario, as people tend to have supplementary income sources, it illustrates the advantage of the credit, especially in lower tax brackets.”
Use segregated funds with guarantees
Another option is to own a segregated fund contract, which contains market-based investments in an insurance contract. Benefits of these contracts include guarantees, such as a guaranteed income or a minimum guaranteed value at the maturity date. “There are many versions of segregated fund contracts,” Ezekiel says. “For example, some guarantee a portion of the capital invested, while others guarantee a specified level of income for life.”
Income guarantees, he adds, are largely based on the amount invested and the age of the annuitant — the individual upon whose life the contract is based.
Senior and more conservative investors find these products useful, as they can supplement a retirement plan by providing a guaranteed income stream for life, he says.
Small-business owners might find these products worthwhile, too, he adds, as they can act like a pension plan by providing funds for life. “The small-business owner could invest savings in a segregated fund contract at or even leading up to retirement,” he says. “As well, the earlier you invest in this type of vehicle, the sooner you can [protect yourself] from a significant market downturn.
Pay attention to returns
The only way to increase savings is to make some sort of return in the market. While that return will vary based on your goals and where markets are at in their cycle — stocks and bonds go up and they go down — you should create a portfolio that can achieve the return you need.
While it’s never a good idea to jump from one investment to another, it is important to keep an eye on returns, and how similar funds are performing, Ezekiel says.
If you notice a similar fund keeps beating the performance of the one you hold, then consider making a switch. While past performance doesn’t mean future success, you do want to invest with someone who has a good track record, he says.
Pay attention to fees, too. To get the same return, a fund with a 2.5%t management expense ratio (MER) has to outperform the market more than a fund with a 1% MER would. A higher MER is not an issue on its own – maybe that higher-priced fund is generating a better return than the lower MER one. But if a manager can’t beat a comparative product because the MER is too high, then that could be a reason to switch. “The bottom line is, ‘what am I getting from what I hold,’” says Ezekiel
At this point, Chapman says he is satisfied with his retirement savings strategy. He uses the dividends from his ETFs to buy more units, while his portfolio is growing steadily.
“I’m happy with how my retirement assets are growing,” he says. “It’s one fewer thing to worry about.”