B8 G T H E G LO B E A N D M A I L • T H U R S DAY , F E B R U A RY 1 6 , 2 0 1 7

SELF-DIRECTED INVESTING

• REPORT ON BUSINESS

Dave Nugent has had an idearolling around his head for a

while. Tax-free savings accounts,he thinks, might better be brand-ed with a new name: tax-freeinvestment accounts.

“Too many people leave it sit-ting in cash,” says Mr. Nugent, thechief investment officer ofWealthsimple, the Toronto-based,passive, online only robo-adviserwith a large millennial clientbase. He speaks to a lot of young-er investors, especially thoselooking to save for big life eventssuch as a wedding or a first home.

And unless those folks are just acouple of years away from thepurchase, “you need to get invest-ed, and grow your money aboveinflation.”

For millennials within their firstdecade in the work force, as soonas you start making enough mon-ey to save, it can seem like you al-ready have occasion to spend it.But, depending on how far awayyour goals are, there are strategicways to allocate assets in differentaccounts for different purposes.

“The greatest advantage a mil-lennial has is they typically havetime on their side,” says Mr.Nugent, who knows the demo-graphic well. He’s 31. He oftenhears from younger clients waryof stock market tumult, especiallyfor mid-term goals of five or 10years. “That’s actually a reason-able amount of time to invest.”

Hence his criticism of theTFSA’s name. Even if your biggestfinancial goals are planned forthe next couple of years, savingfor multiple goals is prudent – asfar away as it is, there’s always re-tirement – and it means investingwisely.

In terms of asset mix, he recom-mends the traditional march tosafety. With a five- or 10-year hori-zon before a financial goal, Mr.Nugent suggests going aggressiveon equities – up to three-quartersof the portfolio – and then gradu-ally raising the fixed-income orcash-equivalent component untilthe three-year mark, when every-thing should be in cash or cashequivalents.

Shannon Lee Simmons, a certi-fied financial planner with thefee-only New School of Financeadvisory in Toronto, also recom-mends diminishing risk in the

race to the finish line. “Cash-likeproducts ... are super boring, buthaving exposure to volatilitymight not be a good idea,” saysMs. Simmons, whose roster of cli-ents is mostly between 25 and 45.

Meanwhile, the accounts yourassets should sit in – TFSAs andregistered retirement savingsplans – depend on your individu-al financial situation.

If home ownership is on yourmind, RRSPs have the built-inadvantage of the First-TimeHome Buyers’ Tax Credit – an up-to-$25,000 saving grace for many– but it’s effectively a loan, andthose who use it need to repay itover 15 years. For some, that canadd an undue amount of pressureon mortgage payments.

“You shouldn’t stretch to buy ahouse,” Mr. Nugent says. Buildingsavings through a TFSA can be awise alternative, then, since “youdon’t have the burden of havingto recontribute each year.”

TFSAs are “choose-your-own-adventure” accounts, Ms. Sim-

mons says, since they offer a tax-sheltered chance for younger mil-lennials to save for bothimmediate goals – with a conser-vative asset mix – and can be amore aggressive retirementaccount once life’s big expendi-tures are out of the way. “For me,it’s basically matching a TFSAasset mix to your goals,” she says.

For some goals, such as a wed-ding, a TFSA’s liquidity makes it ano-brainer, Ms. Simmons says.For home ownership, things canget trickier.

“If you put money into yourRRSP, yes, you can get a refundtoday, but you’re basically defer-ring tax to the future,” Mr. Nugentsays. If you need to withdraw it,though – particularly if youhaven’t retired but find yourselfin a higher tax bracket than whenyou made contributions to theRRSP – the benefits disappear.

If that’s the case, Mr. Nugentsays, “you’re better off contribut-ing to a TFSA.”

Within an RRSP, Ms. Simmons

points out, there’s no reason whyyou can’t save for multiple goals,with your money allocated differ-ently for each. The first $25,000,in cash equivalents and ready towithdraw soon for a home pur-chase, “might be a totally sepa-rate beast than the rest of theRRSP.”

“If you drop $40,000 in there,”she continues, “even if you’regoing to buy a house, that $15,000on top of the 25 can be invested ina growth-oriented asset mix. Golong – you’re not going to touch itfor 30 years.”

There are serious drawbacks,though, to playing chicken withthe stock market with anything inyour RRSP or TFSA earmarked fora home downpayment. Gainingan extra 10 per cent on yourdownpayment might meanslightly decreased mortgage pay-ments, but it likely won’t affectthe house you buy, Mr. Nugentsays. But the opposite?

“If you were to lose 10 per centof your downpayment,” Mr.

Nugent says, “that affects the typeof house you buy, that could deferyour purchase to later years, ornow you have a high-ratio mort-gage to pay [Canadian Mortgageand Housing Corporation] insur-ance on.”

TD Wealth financial plannerShelley Smith warns that thethreat of losing 10 per cent of adownpayment might seem small,and suggests to consider what itwould actually cost. “If you put itin dollar terms for someone whohas saved up $20,000 or $30,000,what if it’s worth $3,000 or$4,000 less? How do you feelabout that?”

Even after jumping big hurdlesfor things such as a home down-payment, Ms. Smith advises hav-ing a wide-ranging portfolio toweather different market condi-tions and to have some liquidassets in case of emergency. “Thediversified portfolio will allowyou access to investments thatperform differently at differenttimes,” she says.

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PORTFOLIOS

TFSAs – choose adventure or investmentMillennials have options when saving for multiple goals – even retirement, as far away as it might seem

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JOSH O’KANE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TFSAs can be ‘choose-your-own-adventure’ accounts because they offer a tax-sheltered chance for younger people to save for both immediate goals andcan later be a more aggressive retirement account. ISTOCKPHOTO

Emily Larimer understands,perhaps better than most, the

importance of taking meticuloussteps to build up her retirementsavings.

The 55-year-old Toronto-basedchartered professional account-ant, who is single and suffersfrom multiple sclerosis thatrequires expensive drug treat-ment, established her registeredretirement savings plan (RRSP)at age 30, and has also contribut-ed to a tax-free savings account(TFSA) in recent years.

“You just don’t know what’sgoing to happen, so you need toset things up to care for yourselfwhen you’re older. That’s why Iset up an RRSP at an early age. Idon’t think Old Age Security isgoing to provide nearly enoughto take care of me as I get older,”says Ms. Larimer.

To provide an extra cushion forretirement, Ms. Larimer owns herown home, has paid off her mort-gage, made improvements to in-crease its value, and has taken ina boarder to provide rental in-come.

“Paying off my mortgage wasincredibly important to me. It’sanother way that I’m taking careof myself, because nobody else isaround to do that for me,” shesays.

Experts stress that while retire-ment planning is an importantpriority for everyone, regardlessof their marital status, singlebaby boomers – the youngest ofwhich are now 52 and roughly adecade from retirement, need tobe especially diligent. They mustpay for their mortgage, food, tax-es and all other current livingexpenses with one income, plussave enough money to supportthemselves when they decide toretire, without the possible safetynet that a spouse might provide.

The task may be even moredaunting for women. A genderwage gap still exists in many

industries. Women tend to takemore time away from the workforce as caregivers for familymembers. And statistically, theylive significantly longer thanmen. According to the WorldHealth Organization, in 2015 aCanadian male at 60 couldexpect to live for an average of23.5 more years, while a Canadianfemale at 60 had another 26.4years.

Graeme Egan, a financial advis-er with CastleBay Wealth Man-agement Inc., fee-only financialplanners in Vancouver, suggeststhat women project a 95-yearlifespan when they plan for re-tirement.

What to invest in is more sub-jective. Sabrina Castellano Smith,director of the retiree planningnetwork for Investors GroupFinancial Services Inc. in Winni-peg, says a common questionfrom her clients, including thosewho are single, is whether toinvest in an RRSP or TFSA.

Those instruments are struc-tured differently.

For the RRSP, in the 2016 taxa-

tion year, taxpayers can make anannual contribution of up to 18per cent of their previous year’searned income, to a maximum of$25,370. They receive an up-fronttax deduction, and deferred taxliability until the money is with-drawn. The RRSP is set up to ben-efit taxpayers who expect to bein a lower marginal tax bracketwhen they retire. Investmentsinside the RRSP grow on a taxdeferred basis.

Up to $5,500 of after-tax moneycan be contributed annually to aTFSA, and because that is after-tax money, there are no tax con-sequences upon withdrawal.Investments inside the TFSAgrow on a tax-free basis.

“If you are single, considermaximizing your TFSA first.These are great because theinvestments in them aren’ttaxed. This is going to allow youmore flexibility. When it comestime to withdraw the income, it’sa little more favourable,” says Ms.Smith.

But it is also important for sin-gles to have a good mix of RRSPs,

TFSAs and other non-registeredaccount investments, along withany pension income they are en-titled to, in order to provide taxefficient income stream optionsat retirement, she adds.

For a baby boomer in a lowertax bracket, whose income istrending downward, a TFSAmight be the better first priority,says Mr. Egan. But usually peoplewho are roughly 10 years from re-tirement are in their highest in-come earning years, he notes.

“On that basis, I would general-ly say that an RRSP would be thefirst priority because you’re get-ting a tax deduction at the high-est marginal tax rate, or prettyclose, which is creating a taxrefund. And presumably you’regoing to be in a lower tax bracketwhen you take the money out ofthe RRSP,” says Mr. Egan.

The RRSP tax refund also pro-vides some attractive financialplanning options. Mr. Egan sug-gests that it could be used to ei-ther pay down non-taxdeductible debt, or make a con-tribution to the TFSA.

Retirement portfolios shouldalways be under review, but thisis especially so in the 10 years pri-or to retirement, when many willwant to reduce volatility and riskas the window narrows, stress ex-perts.

“I would look at the overall pic-ture. If someone has, say, anoverall asset mix of 60-40, or 70-30 being equity versus fixed in-come, as they approach that timeI would lessen the equity comp-onent of the overall portfolio,”says Mr. Egan.

For somebody who is suddenlydivorced or widowed, resulting inan unexpected change in life cir-cumstances, a visit with a finan-cial adviser can help sort out anynecessary financial changes.

Single individuals who areapproaching retirement, but wellbehind on planning for it, mightalso have to adapt to changingcircumstances quickly. But, saythe experts, it is never too late.

“Start by taking a look at whatyour current cash flow looks like,[and] also reviewing your cur-rent income sources,” says Shell-ey Forsythe, a strategist withCIBC Wealth Strategies Group inVancouver.

“You then want to take a look[at] retirement income sourcesand expenses, breaking it downinto fixed versus discretionary.What kind of expenses willremain the same? What willreduce, or won’t be there? Andare there any health-care relatedcosts that you need to be think-ing about?” Ms. Forsythe elabo-rates.

Ms. Smith recommends thatemployees approach theiremployer to inquire about corpo-rate retirement savings plans thatset aside a portion of pretax in-come for retirement.

Another strategy to consider isborrowing money to make alump-sum catch-up contribution,suggests Mr. Egan.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Special to The Globe and Mail

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PLANNING

Single baby boomers need cushion to pad portfoliosWomen, especially, face a tough task as they look to build wealth on one income

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JEFF BUCKSTEIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Single baby boomers – the youngest of which are now 52 and are roughly a decade from retirement – need to beespecially diligent in building up savings. ISTOCKPHOTO

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T H E G LO B E A N D M A I L • T H U R S DAY , F E B R U A RY 1 6 , 2 0 1 7 G B9

SELF-DIRECTED INVESTING

REPORT ON BUSINESS •

Grandparents setting up anRESP need to communicatetheir goals clearly, advisesDawn Tam, a consultant withRoyal Bank of Canada. Here’show to proceed.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Think long term

Do you have investment mon-ey that’s being taxed – andcould be parked in an RESP?Will you have a large estate?Do you plan on leaving a size-able inheritance? If the answeris yes, talk to a financial advis-er about setting one up.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Determine who’s contributing

If multiple grandparents andparents will be contributing,determine how much eachparty plans to pay in, says Mr.Rechtstaffen. Failure to do sowill trigger a penalty.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Name a successor

Failing to designate a succes-sor could mean the RESP willbe considered a part of yourestate after you die – and willbe taxed accordingly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Anna Sharratt

GRANDPARENTS’ PRIMER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

J im Main is set to put a lot ofpeople through school. But it’s

not his children who are the re-cipients. Mr. Main, a 94-year-oldretired chartered accountantfrom Toronto, has set up 11 regis-tered education savings funds(RESPs) for all of his grandchil-dren and great-grandchildren.

“It’s unfortunate we didn’t startearlier,” says Mr. Main, whodidn’t fund RESPs for his chil-dren because the savings pro-gram did not yet exist, but set upand invested in a grandson’sRESP 15 years ago. “It has a pro-found effect.”

Mr. Main contributed the maxi-mum amount of $2,500 eachyear to each child, investing inbalanced funds. “The last time Ilooked at the return it was quitegood,” he says. “I’m pleased –and I’m sure they are, too.”

Mr. Main is a part of a growingnumber of grandparents who aresetting up – and managing –RESPs for their grandchildren,rather than contributing toRESPs set up by their children.

“There has been increased in-terest as grandparents have seenthe rising cost of education,”says Dawn Tam, a regional finan-cial planning consultant withRoyal Bank of Canada in Vancou-ver. “It’s a very popular option.”

The reasons are myriad. Manyfeel their children are not in afinancial position to contributethe maximum to the plans, aview supported by 2013 RBCresearch. According to Ms. Tam,63 per cent of families with chil-dren 12 and under have RESPs,though 25 per cent contribute$200 or less to them a year.

Saddled with mortgages, carpayments and facing increases inthe cost of living, “young fami-lies have conflicting goals,” shesays.

Ted Rechtshaffen, presidentand chief executive officer of Tri-Delta Financial in Toronto, con-curs. “The kids may not be in aposition to fund it. Generallyspeaking, 60-year-olds havemore money than 40-year-olds.”

At a time when interest ratesare low, many grandparents wantto capitalize on the governmentgrant, also known as the Cana-dian Education Savings Grant(CESG), which the federalgovernment pays when RESPcontributions are made.

If the yearly maximum of$2,500 a child is contributed, thegovernment will add a $500grant. That is an immediate 20-per-cent return on investment.

Mr. Rechtshaffen says unlike40-year-olds who may be invest-ing in RRSPs and TFSAs, retireesoften have non-registered invest-ment money that’s taxed on divi-dends, interest and capital gains.He suggests they talk to a finan-cial planner about whether theyforesee having an estate – or out-living their money.

If they believe there will mon-ey left over – which would be in-herited by children andgrandchildren anyway – he sug-gests RESPs as an investment.“Take that money that’s gettingtaxed for the 60-year-old and putit into an account that’s tax-shel-tered and the government is giv-ing you an instant 20-per-centreturn on it,” he says. “That’s abetter financial move.”

But while RESPs can yield bigreturns, grandparents have to bemindful of the plan’s limitations,as well as family dynamics, toavoid problems.

Mr. Rechtshaffen cautions thatwould-be RESP founders be waryof the maximum contributionlimit of $50,000 and the govern-ment’s lifetime contributionamount of $7,200.

The amount the governmentcontributes is also capped at$500 a year, regardless if an indi-vidual exceeds the $2,500 maxi-mum. However, if an RESP isstarted years after a child is born,the RESP holder can invest mon-ey for each year since that childwas born to qualify for thegovernment contribution. This isbecause the CESG can be carriedforward.

Another thing grandparentsshould watch for is overcontri-buting. Mr. Rechtshaffen warnsthat some families can becomecompetitive about RESP contri-butions, with two sets of grand-parents setting up RESPs for thesame grandchildren. But if thebeneficiaries are the same, thecontribution room – and theCESG – are the same. Overcontri-butions are subject to a penaltyof 1 per cent a month of theamount of the overcontributionin that month.

And if a child decides not topursue postsecondary education,

there is always the option oftransferring the amount investedin the RESP to a sibling in a fam-ily RESP in which two or morechildren are named as benefici-aries. “The other one can suckup the money from the RESP,”says Mr. Rechtshaffen. However,if another child already has anRESP, the amount transferredmust not exceed the maximumcontribution amount.

Worst case, the grandparent,

provided he or she is under age71, can roll over the funds to anRRSP, minus the CESG contribu-tion and the interest on it, saysMs. Tam. For those over 71, taxwill have to be paid on anyamounts in the RESP that arewithdrawn.

As for the type of investmentsto select within an RESP, the skyis the limit, say experts, thoughmany, like Mr. Main, opt for abalanced fund.

Mr. Rechtshaffen, however, sug-gests grandparents who are set-ting up a plan in the grandchild’sfirst year of life, consider thelong time horizon when choos-ing between more aggressive andmore conservative funds.

“If you’re investing early,there’s no need to be too conser-vative,” he says. “The plan isgoing to be around for 20 years.”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Special to The Globe and Mail

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STRATEGY

Calling all grandparents: RESPs are for you, tooPeople over 60 are increasingly using this investment vehicle to get big returns on the investment and academic fronts

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ANNA SHARRATT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

As grandparents watch the rising cost of postsecondary education, they are showing increased interest inregistered education savings accounts. GETTY IMAGES