Babe in the Woods has contacted me again with a bunch of questions. After the last response to her questions, she has gone out and read a couple personal finance books and now has more questions.
So I've just finished reading The Wealthy Barber for the first time, and am pretty inspired. I'm starting to do research on RRSP's and mutual funds, and doing some goal setting, but am confused about a few things. How is the rate of return determined and what can you do to increase it? What are some of the options to big banks, and could I do better with an alternative institution? How do I research which funds and fund managers are the best?
I became more confused when I came across an excerpt from Smoke and Mirrors: Financial Myths That Will Ruin Your Retirement Dreams by David Trahair
He seems to think that mutual funds and RRSPs may be a bad thing because of the baby boomer factor. This is making me think twice, just as I'm about to start my own financial journey. Is there some truth to what he says or is he just blowing smoke? And if it is true would a high interest account be another good option in saving for retirement? My instinct is to trust David Chilton's advice and I like the idea of the split spousal RRSPs, but want to be sure before I start committing to a twenty year plan of action.
Also what would be the best type of account to set up to save for an emergency fund or for things like vacations? I have an old blue chip account with the Royal Bank, so am thinking of looking into their new high interest accounts that you have written about.
The Wealthy Barber is one of my favorite books of all time and taught me a lot in my early years. Perhaps this is the book that can be introduced to your children when they start learning about personal finance. :)
The 2nd book though I haven't read, but I've read from RRSP naysayers before. Nobody knows for sure what the markets are going to return in the long run. Sure, demographics might be a factor, but can anyone really tell for certain? I would say that they put their strong opinions/hypothesis out there to sell books more than anything else.
If you are planning on retiring in 20 years, you need to work out exactly the income that you will require and work backwards from there. If you haven't already, check out my "early retirement series". I did a number of calculations there that help determine the numbers required to retire. Note that you will have to account for the age of your children when you to decide to retire and big debts (like the mortgage) should be paid off by then. One of the best books that I've read with regards to planning for retirement is "Why Swim with the Sharks", which is what my early retirement series is based upon.
With that said, a high interest account that pays 4% within your RRSP is "ok" if you want a small cash holding while waiting for the right investment. However, if you want to retire in 20 years, investing solely in a high interest account will not work. With inflation being around 2.5%-3%/yr, it would leave you with VERY little growth and probably not enough to retire on.
With your husband in a higher tax bracket, an RRSP invested in a balance of equities/bonds would be the ideal choice. When you do start looking into equities, look into index ETF's and/or index mutual funds. If you are just starting the RRSP, I would suggest that you go with bank mutual funds because it will eliminate your annual account fees.
If you do go with a bank, they will probably try to sell you their higher MER products. Don't do it. Simply tell them that you are interested in their INDEX mutual funds. Also, make sure that there are no annual fees associated with the account. I know that CIBC has a bank RRSP account that charges no fees providing that you stick with CIBC sponsored mutual funds. The other big banks should also offer this. If you'd like to buy the index funds yourself online, TD offers the TD-E funds which have extremely low MER's for an Index mutual fund with no annual fee.
Now to answer your questions specifically:
- Rate of return is measured by how well the mutual funds/equities/bonds have returned for the year. This is basically out of your hands, but over the long term (20+ years), equities have returned 8-10%.
- You can research mutual funds through sites like: morningstar.ca or globeinvestor.com
- For an emergency/vacation fund, setup a high interest savings account. My wife and I use a combination of a high interest savings account (@ PC Financial) and personal line of credit. The RBC savings account is also a decent choice where it currently returns 4%, and if you already have a regular chequing account there, it makes it even more appealing.
Hope this answers some of your questions. I don't think the main concern is whether it's best for you (or your husband) to invest in RRSP's or not, I think the real question is what investments are you going to buy within the RRSP. But that's just my opinion.
Disclaimer: This blog post is meant to be of entertainment value only and under no circumstances should be it be considered financial advice. I am not a financial professional so any information that you find on this blog should not be considered financial advice.-> If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).