A warning to people planning to take over their own investments in retirement
What hobbies or activities are you planning to take on in retirement?
Golf? Bridge? Iron-man events? Each sounds good for mind or body. Now for another activity that seems beneficial – managing your own investments.
A reader got in touch recently to ask about this. She and her partner are newly retired and interested in taking a more hands-on approach to their investments, which are currently looked after by an adviser. The adviser charges 1 per cent, which can add up to a significant amount for people who have built substantial retirement savings.
My suggestion: Don’t do it. Set up a small investing account on the side with an online broker to scratch that itch to manage your own investments. Leave your retirement account with the adviser, providing he or she is delivering good service and investment returns.
The argument for leaving retirement savings with a good adviser is partly about the aging process. Last year, I had an e-mail from an 80-year-old doctor who was a lifetime DIY investor. He said he was starting to worry about his ability to manage his investments going forward. Fearing he’d make an investing mistake with his portfolio, he was open to turning his portfolio over to an adviser.
Ideally, taking on management of your own investments when you retire goes well for 10 or 20 years. Then, what? Finding an adviser at any age can be an exhausting process of seeking recommendations from friends and family, having initial conversations and then interviewing prospective candidates.
The reader who asked about self-directed investing was interested in learning more about investing, which is an excellent way to spend time in retirement. The adviser-client relationship works best when there’s a common understanding about the markets, risk, diversification and so on.
But there’s a big difference between learning about investing and managing a portfolio of investments that is relied upon for retirement income, covering big expenses and possibly leaving a legacy for family. Everyone, pros and amateurs alike, make mistakes when investing. The difference is in the mistakes themselves – are they small and fixable, or disastrous in causing long-term damage?
An ideal way to learn about investing in retirement is to open a self-directed tax-free savings account at an online broker. Start fresh with the current year rather than transferring your existing TFSA money, and see how it goes.
— Rob Carrick, personal finance columnist
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Ask Globe Investor
Question: It would be interesting to know what the effective yield of John Heinzl’s model dividend growth portfolio is after taking into account the dividend tax credit. Can you share that?
Answer: Before tax, the portfolio yields about 4.85 per cent, which is the sum of all dividends and distributions on an annualized basis, divided by the portfolio’s current market value. However, it’s not possible to state the after-tax yield, because it will vary widely depending on a person’s total taxable income, province of residence and the tax characteristics – which vary from year to year – of the REITs in the portfolio.
What I can say is that, especially at low income levels, dividends are taxed very favourably thanks to the dividend tax credit. In Ontario, for example, a person with total taxable income of $55,867 or less will have a negative tax rate on dividends. The DTC is a non-refundable credit, which means the government won’t send you a cheque for the negative amount. But you can use it to offset other taxes owing.
Even at higher income levels, tax rates on dividends are still very attractive in many provinces. A person living in British Columbia with income of $100,000, for example, would have a marginal tax rate of just 5.49 per cent on eligible dividend income, compared with 31 per cent on interest, employment or other income. To determine the marginal tax rate on dividend income for your province and income level, check out the combined federal and provincial tax tables at TaxTips.ca
–John Heinzl (E-mail your questions to firstname.lastname@example.org)
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Compiled by Globe Investor Staff