Six smart ways to improve your returns

Many people living on fixed incomes are very concerned their hard-earned retirement savings may dwindle prematurely due to the current — and quite likely future — low interest rate environment. But there’s still ample opportunity to improve returns without putting your money at undue risk. And the sooner you get started, the better.

The following six suggestions will help you get a head start:

1. Divide your money into two categories: fixed income and long-term growth

In today’s low interest rate climate, diversification is essential. If you keep everything in fixed income investments you’ll not have enough growth in your portfolio to sustain itself. In fact, you may be at risk of outliving your capital or not having enough money to cover future cost-of-living increases. With interest rates low and likely to stay that way for years to come, it’s imperative that part of your money be allocated to long-term growth. This means investing in stocks or other equity investments such as equity-based mutual funds. It’s true that equities undergo more fluctuations in value in the short-term. But over the long haul, they usually outperform every other asset category. T longer you can hold on to these types of investments, the less you’ll be affected by any short-term fluctuations. Ensure you have the right asset allocation in order to keep your money growing.

2. Diversify to reduce risk

While your portfolio should include investments from different asset classes (stocks, bonds, money market instruments, etc.), it should also include investments in different sectors and even different geographic regions, including outside Canada. Diversification reduces the risk of investing because the mix in your portfolio will even out most downturns in any one market or investment class.

3. Use tax-paid money first

Some retirees will convert their RRSP into a RRIF at age 65 because they feel they need the income. Ironically, they leave money in non-registered GICs or stocks outside of the RRSP. But the opposite strategy will work much better. Registered funds such as RRSPs and RRIFs earn tax-deferred income. Furthermore, you do not have to pay tax on the money until you take it out of the plan. To keep this tax-free growth potential going, you should be drawing the cash you need from your non-registered holdings first. By leaving the registered money untouched, you can grow it a further four years (or until age 69) tax free, when you must convert to a RRIF or an annuity. Should you go the RRIF route, you should withdraw only the minimum amount required and use your tax-paid, non-registered money for your remaining needs.

4. Stagger maturity dates of bonds

Simply put, you can ask your financial advisor to help set up a portfolio in such a way that different bonds will mature at specific intervals which are usually one year apart. You may hear the expression, “climb a strip bond ladder.” This also refers to staggering. Since a strip bond does not pay interest “- you buy it at a reduced amount and receive the full value of the bond when it matures -” you can ladder or stagger them so that as each matures, you’ll receive a set amount of capital on a regular basis. Strip bonds are like long-term Treasury bills.

5. Consider the cash value of insurance policies

Many retirees hold life insurance policies, such as whole life insurance, which build cash value over time. These can provide a good source of retirement income and with proper planning, will not dilute the policy’s death benefit. Talk to an insurance expert about your options.

Consider new, alternative investments

Changing strategies and lower interest rates call for different types of investment products. A number of financial institutions are responding to this need by promoting some of their lesser-known low-risk investments, such as bond and mortgage mutual funds, mortgage-backed securities, index-linked GICs and balanced monthly income funds. Many of these investments are being offered as higher-paying alternatives to regular GICs. Unlike GICs, the return from these investments fluctuates according to the interest rates in the marketplace, but they’re still considered relatively low risk. Ask your advisor to work out a plan whereby you achieve the level of returns required, without exposure to unnecessary risk.