Tax Time - RRSP Time - TFSA? – Volatility – Fear?
Had enough yet?
If you are investing for the long-term, then for many the choice is to NOT focus on the short to mid term volatility of the current public markets. This time of year is generally frustrating as we navigate taxes and registered plans and possible needs to top them up. Yet many find it challenging in contrast to the last few years where markets remained positive through Covid and other paradigms shifts in the economy, technology and how we live our lives.
Focusing on immediate market and account fluctuations is, in a word, self-sabotage.
This is true for any given market environment – there can be a false sense of progress when markets are up, and it can also create a much dimmer point of view with gloomy discouraging emotions during times when markets fluctuate downward.
You may have seen this chart of emotions before. Emotions, as in reference to investing (and trading more short-term) make a mess of everything financial.
Surely you have seen the charts and over decades the markets are buoyant and positively strong. However, overbought and oversold levels as caused by factors such as macro-economic events, instability, monetary policy will at times make the markets incredibly challenging to navigate. To add, when you are later in life, i.e. you do not have the time to wait 10 or 20 plus years for the markets and your investments to recover from major drawdowns, then concerns build and fear creeps in.
How does one address both fear, insecurity, and uncertainty in life? If we lived in the 17th century, few options would come to mind mitigating these issues. Yet we do not and there are several solutions:
Your general financial picture should be based on solid ground. Are we investing when we should be saving? The positive markets had convinced us all that cash is useless. Heck, this inflation is making this worse. So, no, many did not have adequate emergency funds or safe funds for anything out of the ordinary. Afterall, why get 1% when I can get 12% or more on my money? Completely logical, yes.
Yet what happens when all your eggs are in one basket? Incredible elation or incredible depression.
Financial stability cannot be built with stable progress regardless of market environments if the activity solely relies on rates of return to solve all financial aches, such as:
Have you counted on rates of return to be the favour of all things financial and therefore dismissed other options? If so, in some form or another, your stress levels are likely higher than they could be.
In contrast, common financial advice is solid when based on solid principles. Modern society has ways of creating financial stability through manufactured products that enable long-term management, stability and solutions for many things that can go wrong in life. All one has to do is become aware and consider all aspects.
Referencing the above financial pyramid we will skip the section of protection as that involves life insurance, disability insurance and equally important critical illness insurance. Perhaps covered through work benefits, and if not they are available through us as well. And, to add here, if these are in place in a well designed manner, addressing short term risks and smart long-term estate and tax management, then the piece of mind created by being organized with this important first step helps a great deal in being level headed with current market volatility.
However, what if we could combine savings and growth (the next 2 levels)?
What if you knew your RRSP and TFSA would grow and experience 4% last year towards your retirement regardless of the markets being negative, yet in the prior year (2021) you also enjoyed the double digit returns)?
What if this caused you to not be worried about any negative sequence of returns in retirement? (this is when markets are negative and you add negative pressure on your retirement account by also withdrawing needed funds to live)
1 in 4 pre-retirees do not believe they will have a financially comfortable retirement – and 1 in 2 expect lower standards of living in retirement than what they have today. LIMRA Secure Retirement Institute.
What if your RRSP and/or TFSA could become a pension that never runs dry even if you live in retirement 30 plus years – regardless of market conditions?
Here are some things to consider as you reflect on future investments. Also, we welcome the opportunity to give a second opinion on how your portfolio can possibly be de-stressed.
So, what is best RRSP or TFSA?
It is important for our clients to realize that RRSPs are not the only way to save for retirement in a tax-efficient manner.
There are Permanent Insurance Plans which can be like a turbo-charged TFSA with incredible benefits short-term as well as long-term. These plans have proven to match and surpass equity portfolios without volatility and stress coupled with short-term protection. Dr Pfau has argued that using the second economic power of actuarial science can completely remove negative volatility from your portfolio. Yet more on these options in our next newsletter.
Since it is tax time and we have RRSP deadlines, lets review these scenarios as indicated above.
In scenario 1, we see that from a tax perspective, when a person’s tax rate is the same when they contribute as it is when they redeem, then a TFSA and RRSP have an equal benefit. In this case, other factors should be considered such as, need for current tax refunds, contribution amount etc. in order to make a decision.
However, in scenario 2, if the person’s tax rate when they redeem is expected to be lower than when they contribute, then they should consider investing in an RRSP first and then a TFSA.
Finally, if a person’s tax rate when they redeem is expected to be higher than when they contribute as in scenario 3, then first investing into a TFSA should be considered before an RRSP.
However, the above is a simplification and many also consider that long-term taxation in Canada is very unpredictable in leu of recent government spending.
If you had to guess, would you estimate taxes to be lower or higher in the future?
With this in mind, would you prefer to know that withdrawals would be tax favoured or not taxed at all?
Lastly, what if you wanted to do ‘more’ buying at the low?
Leverage, i.e. borrowing to increase effectiveness, and buying low is always better than buying high.
Caution should be exercised as investing is a marathon, not a sprint, and it needs to be maintained over time, yet if used appropriately investment loans can be very effective and they can help to receive a larger tax refund.
Our team can assist with these steps as well.
Please find below the limits summarized:
Happy Investing!
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