I’m Not Sure What to Do with My RRSP Money—What Should I Do Till I Decide?

Posted on 2014 01 07 by BetCrooks

Well it’s January and “RRSP Season” is officially open. Banks will be angling for your business and offering all sorts of promises of high returns and low risks as tantalizing bait. You may be afraid they may hook and land you like a spring migration Sucker. If you’re not sure what to do with your RRSP money but you want to get it in by the end of February, what should you do?

Keep Your RRSP Funds Flexible and Accessible

Check Transfer Fees for RRSP Funds

What you don’t want to do is get rushed into a bad decision by an arbitrary deadline set by the government’s tax department.

Before investing anywhere, ask

can you can move your money in the future and
how much would a transfer cost

Many banks charge $25-150 to move your RRSP money to another financial institution. A very select few charge nothing.

UPDATE: Please be aware that as of January 2015, Tangerine has started charging a fee if you transfer your RRSP or TFSA from Tangerine to another bank, credit union, brokerage or financial institution.

Choose RRSP Investments That Don’t Lock in Your Money for the Long Term

Until you have time to make a strategy and plan your investment, you shouldn’t sign or buy anything that locks you in for a long term.

Beware of

regular GICs
Most Guaranteed Investment Certificates can NOT be cashed before they mature. Only buy redeemable GICs or short-term GICS (6 months to 1 year) if you are still researching your long-term RRSP investment plan.
back-end-load mutual funds
Some mutual funds charge a large fee if you sell them or transfer out of them within the first 5-10 years that you own units in the fund. These fees may be called Deferred Service Charges, DSC fees, or Deferred Sales Charges, etc. Only buy no-load funds while you are researching your plan.
cyclical stocks
Some types of businesses are prone to boom–and-bust cycles. For example, the Canadian petroleum-producing companies often see their stock prices vary in a wavy pattern depending on the swings of the world price for oil. Be very wary investing in any shares or stocks if you are planning to only stay invested for a short time but be especially cautious with cyclical industries.

What Investments Are Good for a RRSP for a Very Short Term Investment?

If you’re committed to doing some research and making a plan for investing your RRSP money, you may need to park your contribution temporarily until you’re ready to start implementing your plan.

What can you invest in for a very short term?

A high interest RRSP savings account
A short-term GIC
A short-term redeemable GIC
A money market mutual fund
A money market ETF

None of these investments will give you a great rate of return. You are sacrificing yield to increase the safety and accessibility of your principal.

It’s important to remember that you can lose money in a money market fund. Personally, I would recommend the savings accounts or cashable GICs but not the money markets.

Don’t leave your money parked for too long! None of these investments will pay enough interest right now to keep up with the cost of inflation. They make reasonable spots to shelter your investment in the short term but they are not meant for long term use.

The Drawbacks of Transferring a RRSP Contribution to Another Financial Institution

You may have to pay a fee to transfer out your contribution.

It may take 4-8 weeks to move your money from one institution to another. And during that transit time, your money may be earning no interest, distributions, dividends or capital gains whatsoever.

Where’s the Best Place to Invest my RRSP Money in the Short Term?

I don’t know because I’m not you.

Here are some places to consider, though:

Tangerine, formerly called ING Direct
One place to consider is Tangerine.ca ~~ING Direct~~.

UPDATE: Please be aware that as of January 2015, Tangerine plans to start charging a fee if you transfer your RRSP or TFSA from Tangerine to another bank, credit union, brokerage or financial institution.

From June 1 till July 31, 2014, you can earn 2.50% (That’s the annual rate!) on cash deposited in a RRSP Investment Savings Account at Tangerine ~~ING Direct~~ that increases your total in all savings type accounts at Tangerine above your balance on April 7, 2014. It has to be “new” RRSP money, not just a transfer from another Tangerine ~~ING Direct~~ RRSP product.

It’s important to understand that you are NOT earning 2.5% on your investment for only investing for 3 months. For example, if you contribute $1 000 to your RRSP on January 1, you will not get paid $25 on May 1; You would get a bit less than 1 /4 of that amount, or about $6.

After July 31, the rate will drop down like a rock, probably to the previous rate of 1.35% or less per year. So you will want to keep working on your investment plan and shift the money once you know where you want to keep it for the long term.

There are no fees or service charges nor is there any fee to transfer your RRSP money out of your Tangerine ING Direct ISA to another financial institution at the time this article was written in January 2014. (Always phone and check for changes to fees and transfer fees BEFORE making an investment! Things can change for the worse.)

I will no longer recommend Tangerine because it will charge a transfer fee.

Peoples Trust
Peoples Trust does have free transfers of RRSP funds to other institutions. (Although you should confirm this again before investing.) It only offers GICs, however. There is a 1-year-term non-redeemable GIC available with a minimum investment of $1 000. If you know you won’t be ready to invest the money elsewhere for a year, it is a possible choice to consider.

Home Trust
Home Trust also appears to have free transfers of RRSP funds. (Again, confirm before investing in case this has changed.) It offers 1-year-term non-redeemable GICs and also 90-364 day short-term investments. The minimum investment is $1 000 for a GIC and $2 500 for a shorter term investment.

PC Financial
PC Financial does not offer free transfers of your RRSP funds to other financial institutions. I won’t recommend them for that reason.

Other Institutions
I’m sure there are other places, especially credit unions or trust companies, that can offer similar benefits. If you use one, please share some information about it with a comment.

Where Do I Park My RRSP Contribution?

UPDATE: I no longer will use Tangerine as previously described because they now charge a transfer fee. I usually do drop our RRSP investment in to Tangerine ING Direct in January, and then move it by transferring it to one of our other planned investment choices. It’s worked very well for me in the past, especially since we can make the contribution online with a couple of mouse clicks, and can print off our official RRSP contribution tax receipts very easily. (No waiting for the mail!)

Related Reading

Join In
Do you already have a RRSP investment strategy or are you still researching your options? Do you ever park your new RRSP money temporarily until you can use it effectively? If so, where? Please share your views with a comment.

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Retirement Planning: What Rate of Inflation Should I Use?

Posted on 2013 11 21 by BetCrooks

Michael James on Money started it. Then BigCajunMan took over— trying to estimate how much income he could draw out of a retirement nest egg based on various factors including inflation and the rate that the investments grow before withdrawal. As he says, it is very hard to pick what percentage to use for inflation. CPP is also “indexed” to inflation at a rate picked by the government so your monthly check can go up. I’ve generally found our bills go up more in a year than that government rate, though. So for my personal retirement planning I wondered what rate of inflation I should use.

Being an Information Pack Rat Has Some Uses

I’ve always been an information pack rat. In fact, I could tell you how much income tax I paid for working for the public library one year while in high school. (I can guess how few people are actually going to ask that.) For this exercise, it’s handy though. I know how much we’ve paid each year, actually each month, for most of our billable household costs.

From that information, I can calculate an approximate rate of inflation.

Estimating Inflation When Costs Don’t Always Increase

It gets a bit tricky because costs don’t actually always increase. Our Natural Gas costs, for example, are significantly lower now than in the past. (Thanks to shale gas frac’ing: We now have cheap nat gas but one day when we can’t get any clean drinking water at any price we may not be so thankful.)

During the interval 2001-2012:

Highest Natural Gas year: 2006: $1727
Lowest Natural Gas year to date: 2012: $924

What should I use to estimate the rate of inflation if it’s actually deflation?

Well, if I estimate inflation too highly I will have extra money to spend on the occasional rutabaga; if I estimate it too lowly I will have to forfeit my semi-annual clementine: I vote over estimate. So I will cheat and pretend the price of natural gas rose from $924 to $1727.

Car insurance can also dip for some people as their car ages. Not for us of course! We live in a “car accident capital of Canada” so we pay almost identical insurance on our brand new Camry as we do on our 15-year-old Corolla. Go figure. We’re insured basically against what we can do to someone else. (Good thing we usually walk to work.)

Our Personal Planning Inflation Estimates Based on Costs from 2001 to 2012

Not all the numbers are in yet for 2013 so these estimates are based on payments from 2001 to 2012.

Our Property Tax Inflation

Our mayor has made a valiant effort to keep these increases as low as possible. Even so our property taxes have increased: 2.9% per year

Our Home and Car Insurance Inflation

I’m lumping these two together since we buy both from the same company and there is a discount involved.

Our insurance costs have increased: 0.46% per year

(Yes, that was surprising! Please remember though that the replacement value for one car in that time has dropped 12 years worth to basically 0.)

Our Natural Gas Inflation

NOTE: This is not the increase in cost per BTU. This is the increase in our total bill. It includes tax increases and if we had any increases in consumption per year.

This is the one I’m lying about and flipping from deflation to inflation. This is my “mad rutabaga” money.

Our natural gas rates have (decreased) increased: 5.8% per year

Our Electricity Inflation

We use more electricity now than we used to. I blame the kids.

Again, this is not the increase in cost per megawatt. This is the increase in our total bill including all the lovely surcharges added by the government and the time of use rates.

Our electricity costs have increased: 1.7% per year

Our Water Inflation

Strictly speaking, we pay for both water, waste water and water infrastructure based on how many m3 of water we use per year.

Our water costs have increased: 4.1% per year

Our Cable TV Inflation

Well, this is a bit misleading. We got rid of our cable this year when they tried to raise my rates again. However, in the interests of historical accuracy, and shock, here goes.

Our cable TV costs had increased: 3.5% per year

Our Telephone (Landline) Inflation

We aren’t really cell phone users having simple pay-as-you-go emergency phones only. So luckily, there’s only one number to report here.

This cost includes our long distance charges. We barely make any long distance calls and when we do we use one of those “dial 10-10-xxx” things so they only cost 25 cents.

Our telephone costs have increased: 0.8% per year

OK, I admit I was surprised by how low that is, too.

Our Internet Inflation

We were “early adaptors” to using high speed internet so we’ve always paid too much.

Our inflation rate is probably lower than people’s because when you start at the top, there’s less distance to climb.

Our internet costs have increased: 2% per year

Our Gasoline Inflation

This one is a bit tough to calculate too. I’m not interested in the percent increase in the cost per litre, although I could tell you that if you forced me to. I’m interested in the percent increase in total annual spending. The problem is that we only go on a major cross-Canada road trip every second year. And after someone totaled my car last year, we went down to one car for 6 months. So I think I’ll just have to skip this one.

It’s not really a mandatory retirement expense anyway, as we’ll probably have to walk everywhere when we retire because we’ll be too broke to afford a car. Unless there’s some way we could power one off those extra rutabagas….Hmmmmmm.

An Overall Personal Rate of Inflation Based on 2001-2012

So what do I get if I try the same overall calculation but based on the sum of our costs for

natural gas
electricity
water
property taxes
cable
telephone
internet
house and car insurance

Our overall personal rate of inflation for 2001-2012 was: 2.3% a year

OK, I admit it again. I’m surprised. I was expecting more like 4%.

If you want to know how that compares to our single-year rate of inflation for 2011-2012, please see: Budgeting for Retirement Requires a Good Estimate of My Personal Rate of Inflation for 2012.