Q&A With Gordon Pape: Can I Save For Retirement and Build an Emergency Fund?

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How should this reader use her TFSA to save for retirement and build an emergency fund?

Q – I have a question about investing in my retirement. I just turned 41. I have no debt except our mortgage, which will be paid off in nine years. I have no investment savings. I am a stay-at-home mom. I do work occasionally; I bring home about $3,000 a year. My husband is the breadwinner and he has retirement savings.

I just recently read your book, The Ultimate TFSA Guide, thinking this would be my best option to start off with. I would only be able to afford about $200 per month. I also would like to have an emergency fund. So, my thoughts are for the emergency fund I open a TFSA with some cashable GICs.

For my retirement fund, I realize I will have to be more aggressive to really get caught up, so I am thinking stocks and EFTs. I have done a lot of reading on the subject of investing, but it still does not make sense. I am just not sure where to put my money to get the best bang for my buck.

I have spoken with our advisor at Investors Group, one at my credit union, and an acquaintance at RBC. All suggested mutual funds. I also checked out PC Financial because of the fact that they pay interest when the balance exceeds $1,000, but right now their interest rates look very low. I guess I am asking who and where to give my money to. Thanks. – Carrie

A – In investing terms, you’re trying to match apples and oranges. Let’s separate the two.

As far as an emergency fund goes, yes, a TFSA is a good idea and cashable (also called redeemable) GICs are one option. However, their rates are lower than locked-in GICs and there may be penalties for redeeming early. Check the terms carefully. An alternative is a high-interest savings account or a short-term bond fund. More on that to follow.

Saving for retirement requires a different approach, as you are aware. The advisors you consulted all recommended mutual funds for the simple reason that’s what they sell, and they earn commissions from them. However, mutual fund fees can be expensive and eat away at your savings.

An alternative is to open a TFSA with a discount broker. Try to find one that does not charge a commission on ETF purchases.

Direct the amount you want to go into an emergency fund to a high-interest savings account or a short-term bond fund such as iShares Core Canadian Short Term Bond Index ETF (TSX: XSB). It gained 2.75 per cent in the year to Jan. 31 and has a low management expense ratio of 0.17 per cent. Build the emergency fund to your desired level first.

Then add some low-cost growth index funds – you’ll find several recommendations by consulting our Recommended List. Diversify your retirement portfolio to include a bond ETF, a Canadian stock ETF, a U.S. stock ETF, and an international stock ETF.

Over time, you’ll build a healthy retirement fund, with some emergency money always available. And when it comes time to withdraw some cash, it will all be tax-free! – G.P.

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