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According to a CIBC study in 2019, Canadian women control $2.2 trillion of assets. But that will almost double to $4 trillion by 2028 and could be a lot more if real estate is included. While that wealth is increasing, the need for basic financial and investment literacy has never been greater. I’m often asked what three investing tips I would put at the top of the list for women to know. Here they are.
Tax is the single largest cause of wealth erosion in Canada today and accounts for a 28% impact. So it’s important to shrink the tax take as much as possible. There is one sure-fire way to create tax free dollars:
Tax Free Savings Account (TFSA). The beauty of the TFSA is that you never pay tax on the investment growth inside the plan, and all withdrawals from the plan are tax free. So open a TFSA and max it out every year. And do it regardless of how old or young you are today.
Let’s say you are 30 years old today and make $50,000 a year. You have $10,000 in a TFSa and you contribute $5,000 at the start of each and every year until you stop working at age 65. Let’s target a reasonable 8% average annual compounded rate of return on the investments inside TFSA. By the time you reach age 65 in 35 years, you would have $1,067,412 in the TFSA.
Tax-saving doesn’t end with TFSAs. In fact, there are a number of tax-saving strategies that I call the “4 Ds”: deduct; defer, diminish; divide.
Deduct and defer. This is a strategy you’ll use when you put money into a Registered Retirement Savings Plan (RRSP). You get to deduct your contribution from your income. And tax on income earned from investments in the plan is deferred until you withdraw your money from the plan at retirement.
Divide and diminish. If you have children a Registered Education Savings Plan (RESP) will help you “divide” income by splitting it with your children, thus “diminishing” the tax. This structure allows you not only to save for your children’s post-secondary education but it also cuts your overall tax bill.
When contribute to an RESP, you are transferring future tax liability. You achieve “divide” by essentially putting money into your kids’ names as beneficiaries of the RESP. The investments in the RESP grow tax-free until your children withdraw it pay for a qualifying post-secondary institution. At that time, the income is taxed at your child’s tax rate, which will most likely be next to zero, while you will very probably be in your peak earning years with a tax bracket as high as 50%. The kicker is that there’s an additional Canadian Education Savings Grant of up to $500 a year to a lifetime maximum of $7,200. It’s free money to add even more to that compound growth rate in the RESP.
Investment costs (as opposed to the price you pay) can be a big hurdle to achieving good investment returns. Mutual funds, for example, are probably the most popular vehicle in Canada for investing for retirement. But the cost of holding a mutual fund can be very high. Fund managers’ compensation, advisor’s fees, and administration costs can push a fund’s management expense ratio (MER) to 2.5% or more. MERs of segregated funds are even higher ranging from 5% and up. This is paid out by the fund, reducing assets, and thus cutting the return to investors. A commission, or “load,” which is paid by the investor directly to an advisor or broker, will increase the cost of the fund even more.
When choosing funds, look for cost efficiency. The mutual fund marketplace has become much more competitive and MERs can be quite low on some series of funds. But you have to shop around, and a good place to start is the Fund Library mutual fund database. Another solution is to use exchange-traded funds (ETFs), where fees are typically less than 1% of assets. Some are just a few basis points above zero. With ETFs you can trim the overall costs by one percentage point or more. But again, research and selectivity are essential (check the Fund Library ETF database). A low fee does not necessarily make a good fund, whether mutual fund or ETF. So pay attention to the costs of your investment, not just the “price,” and evaluate whether you are getting your money’s worth in terms of fund management and performance.
Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.
Notes and Disclaimer
© 2021 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.
The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.
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