RRSPs: Be realistic and avoid GICs
Canadians have socked away a lot of money in RRSPs. As of 2005 (the latest year for which I could find data), we collectively held about $600 billion in RRSP assets.
According to the Survey of Financial Security (SFS) conducted by Statistics Canada that year, mutual funds were the most popular choice for RRSP investors, showing up in about 40 per cent of all accounts. This is not surprising; mutual funds and their cousins, ETFs, are the easiest way to put together a well-diversified portfolio at low cost. But, based on the e-mails I receive, it seems that a lot of fund investors are unhappy with their returns in recent years.
In many cases, this may be a matter of unrealistic expectations. The average fund in the Canadian neutral balanced category, which would have an asset mix that is broadly in line for what I recommend for an RRSP, produced an annual compound rate of return of only 1.3 per cent over the past five years (to Jan. 31).
However, performance results over that time frame were badly skewed by the market crash of 2008-09. If we look at the 20-year numbers for this category — which is more in keeping with the timeframe of RRSP investors — the average annual compound rate of return is 6.3 per cent. That’s slightly better than the 6 per cent target I suggest people use in assessing RRSP performance in the current investment climate.
So it’s important to set a realistic and attainable target for your RRSP returns and structure your plan with it in mind. This will enable you to judge your results against a specific target rather than some benchmark that may not be applicable to the type of portfolio you’ve created.
Going back to the 2005 survey, 20 per cent of the families with RRSPs had at least some of their money in guaranteed investment certificates (GICs). StatsCan did not tell us how much of the total RRSP assets were invested in GICs but a reasonable estimate would be in the $100 billion range at that time and probably much more today.
The report described GICs as “secure interest-earning assets (that) provide investors with a set return for a specific period, so they know ahead of time what their money will earn over the period”. That’s true enough. The problem is that with interest rates so low, the interest earned on GICs right now may not be enough even to keep pace with inflation, let alone add to your retirement income purchasing power.
Some readers have told me they don’t care — all they want is to know their money is “safe”. My answer is always the same. No investment that produces a return that is less than the increase in the CPI is truly safe.
The latest data shows that the annualized inflation rate in this country is running at 2.3 per cent. The current rate offered on Royal Bank non-redeemable GICs is 2.1 per cent. You have to go out to seven years to get 2.3 per cent and even then you would only be keeping pace with inflation. That’s not a good way to use your RRSP money.
You can do better if you invest your money with smaller financial companies or offshore banks that operate in Canada. For example, ICICI Canada, which is a subsidiary of a major Indian bank, was recently quoting 3.3 per cent on a five-year GIC, compounded annually. Manitoba-based Achieva Financial and MAXA Financial both offered 3.25 per cent.
If you insist on using GICs for your RRSP money right now — which I do not advise — you can beat inflation by about one percentage point. But you have to be willing to go outside the mainstream banking system to do so. If you do, be sure to ask if the GIC is covered by deposit insurance.
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