There are fac­tors we can con­trol that can help in the long run, Ja­son Heath writes.

Vancouver Sun - - FINANCIAL POST - Fi­nan­cial Post Ja­son Heath is a fee-only Cer­ti­fied Fi­nan­cial Plan­ner (CFP) and in­come tax pro­fes­sional for Ob­jec­tive Fi­nan­cial Part­ners Inc. in Toronto.

The fi­nan­cial in­dus­try and me­dia fo­cus a lot on in­vest­ing. Peo­ple want to know if stocks are go­ing to go up or down. Is the Cana­dian dol­lar go­ing to strengthen? Should they buy bit­coin? I have no in­ter­est in se­cu­rity se­lec­tion or mar­ket tim­ing my­self. These are grey areas and I pre­fer to fo­cus on black and white.

I do not sell in­vest­ments, but I spend a lot of my time talk­ing to in­vestors and in­vest­ment ad­vis­ers about them. Since I am not pre­oc­cu­pied with what to buy or sell or when, I spend a lot of time help­ing pre­vent avoid­able mis­takes with re­tirees’ in­vest­ments.

There are lots of mis­takes that in­vestors make, but there are six com­mon ones I ob­serve specif­i­cally with re­tirees.


Div­i­dends sound like an in­vestor’s dream — par­tic­u­larly a re­tiree. You buy a stock and re­ceive a steady quar­terly pay­ment that gen­er­ally rises over time. There are five Cana­dian banks, three pipe­lines and three tele­coms, among other stocks on the S&P/ TSX 60, cur­rently pay­ing div­i­dends of more than 3.5 per cent. Some re­tirees would buy these 11 stocks and call it a day. Be­sides not be­ing well di­ver­si­fied, there are other prob­lems with this ap­proach.

Div­i­dends are a cash dis­tri­bu­tion of profit agreed upon by a com­pany’s board of di­rec­tors. Com­pa­nies that do not pay div­i­dends may be equally prof­itable, but their board of di­rec­tors may de­cide to rein­vest the prof­its in the business, lead­ing to fu­ture growth or fu­ture div­i­dends. So, a com­pany that does not pay out a div­i­dend or pays a lower div­i­dend may pro­vide more of its re­turn to an in­vestor in the form of fu­ture cap­i­tal gains, stock price in­creases or div­i­dends. Div­i­dend yields alone do not make one stock a bet­ter in­vest­ment than an­other.

From a tax­a­tion per­spec­tive, in a tax­able non-reg­is­tered ac­count, cap­i­tal gains are only 50 per cent tax­able and tax is only payable once cap­i­tal gains are re­al­ized when a stock is sold. Div­i­dends, on the other hand, are tax­able ev­ery year as an in­vestor re­ceives them. Cap­i­tal gains may there­fore al­low for bet­ter tax de­fer­ral and even bet­ter tax ef­fi­ciency in non-reg­is­tered ac­counts, al­though at low lev­els of in­come, Cana­dian div­i­dends may be taxed at a lower rate than cap­i­tal gains dur­ing a given year.

The point is there are dif­fer­ent ways to earn a re­turn. You can cre­ate your own div­i­dend by sim­ply sell­ing ap­pre­ci­ated in­vest­ments over time as you need the in­come. There is also re­search that sug­gests that smaller com­pa­nies that pay lower div­i­dends or no div­i­dends may gen­er­ate higher all-in re­turns than es­tab­lished div­i­dend pay­ing stocks over the long run.

Try to avoid ac­cu­mu­lat­ing a port­fo­lio of bank stocks, pipe­lines and tele­coms sim­ply be­cause they have high div­i­dends. Ev­ery­one else knows they have high div­i­dends too so buy­ing them is not some­how out­smart­ing the stock mar­ket or other in­vestors.


Cap­i­tal gains can be a bit of a trap. In­vestors buy stocks, some­times hold them for a long time and of­ten end up with large de­ferred cap­i­tal gains in tax­able non-reg­is­tered ac­counts. Tax paral­y­sis can pre­vent peo­ple from sell­ing ap­pre­ci­ated in­vest­ments that they do not re­ally want to own any more or can cause an in­di­vid­ual hold­ing to be­come too large a pro­por­tion of an in­vestor’s port­fo­lio.

The re­sult may be that tax de­fer­ral be­comes more im­por­tant than pru­dent in­vest­ing. The ben­e­fit of tax de­fer­ral — which is not like tax sav­ings and is only tem­po­rary — may be off­set by a poor in­vest­ment strat­egy.

See­ing as how cap­i­tal gains will need to be re­al­ized even­tu­ally, whether to help fund re­tire­ment or at the very least at death when you are deemed to sell all your as­sets, a strate­gic re­al­iza­tion of cap­i­tal gains may be bet­ter than in­def­i­nite de­fer­ral.


You may not have to take with­drawals from your Reg­is­tered Re­tire­ment In­come Fund (RRIF) un­til you turn 72, but that does not mean that you should al­ways wait that long. Par­tic­u­larly for those who re­tire early, tak­ing RRIF with­drawals long be­fore age 72 should be con­sid­ered.

RRIF with­drawals are fully tax­able and if a re­tiree has a low in­come in their ‘60s, but a high in­come in their ‘70s, they of­ten end up pay­ing more life­time tax by de­fer­ring their RRIF with­drawals. De­layed RRSP con­ver­sion could lead to a re­tiree be­ing pushed into a higher tax bracket or even hav­ing their Old Age Se­cu­rity (OAS) pen­sion re­duced or out­right elim­i­nated through OAS claw­back if their in­come is too high.


Most Cana­di­ans start their Canada Pen­sion Plan (CPP) and Old Age Se­cu­rity (OAS) pen­sions at age 65. The rea­son is two-fold in my opin­ion.

The first is be­cause they get CPP and OAS ap­pli­ca­tions in the mail when they are 64. I sus­pect most peo­ple sim­ply as­sume they are sup­posed to fill them out and just start their pen­sions at 65 by de­fault, with­out much fore­sight.

An­other rea­son is that most peo­ple would rather pre­serve their in­vest­ments by start­ing their pen­sion in­comes than draw down their in­vest­ments and de­lay their pen­sions. CPP and OAS can be de­layed un­til age 70 at the lat­est and re­sult in 8.4 per cent and 7.2 per cent an­nual in­creases in pen­sion en­ti­tle­ment re­spec­tively. For those who ex­pect to live a long life into their ‘80s, de­fer­ring their CPP and OAS and with­draw­ing from their in­vest­ments may be ad­van­ta­geous and pro­vide more re­tire­ment in­come in the long run.


I have al­ways thought the name “Tax Free Sav­ings Ac­count” was a bad one for the TFSA. It sug­gests it is like a sav­ings ac­count, as op­posed to a Reg­is­tered Re­tire­ment Sav­ings Plan (RRSP), meant for re­tire­ment. They are both meant for sav­ing, in­vest­ing and re­tire­ment. Sta­tis­tics show most money in TFSAs is in cash in­stead of in­vested. This may be a mistake for re­tirees who hold cash in their TFSA.

An­other mistake I no­tice is that peo­ple may forego TFSA con­tri­bu­tions in re­tire­ment be­cause they feel they do not have the cash flow to make con­tri­bu­tions. They are in draw­down mode, so how can they con­tribute to their TFSA?

If re­tirees have non-reg­is­tered sav­ings, they would be wise to shift money to their TFSA each year to make their an­nual con­tri­bu­tion. And as stated pre­vi­ously, early RRIF with­drawals of­ten make sense for re­tirees and may gen­er­ate the op­por­tu­nity to con­tribute to or at least pre­serve TFSA sav­ings.


Many in­vestors have the same as­set al­lo­ca­tion across all their ac­counts. This may not be the best ap­proach.

I think it is im­por­tant to look at which ac­counts you will be draw­ing from and when to try to de­ter­mine as­set al­lo­ca­tion and where to hold more con­ser­va­tive in­vest­ments ver­sus more ag­gres­sive ones.

Dif­fer­ent in­vest­ment in­come is taxed dif­fer­ently as well, so tax ef­fi­ciency is also im­por­tant when de­ter­min­ing where to hold what.

It can also be very tax­ing to hold more con­ser­va­tive in­vest­ments in a tax­able non-reg­is­tered ac­count or a tax-free TFSA ac­count, while hold­ing stocks in a reg­is­tered ac­count. Imag­ine you had two $100,000 ac­counts. One of them was in GICs earn­ing two per cent and the other in stocks earn­ing six per cent. Af­ter 10 years, the GIC ac­count would be worth $121,899 and the stock ac­count would be worth $179,085.

Would you rather the larger ac­count be your tax-de­ferred RRSP ac­count, where your with­drawals are 100 per cent tax­able to you, or would you pre­fer that growth in your more tax-ef­fi­cient ac­counts? In a TFSA, those with­drawals would be tax-free and in a non-reg­is­tered ac­count, cap­i­tal gains are only 50 per cent tax­able, with the other 50 per cent tax-free.

I do not know whether stocks are go­ing to go up or down in 2018. I am not sure what is go­ing to hap­pen with the loonie. And I must ad­mit that I do not re­ally un­der­stand bit­coin, nor do I know how much it will be worth a year from now. But what I do know is that re­tirees make a lot of avoid­able mis­takes with their in­vest­ments.

There are plenty of com­pet­ing fac­tors well be­yond our con­trol when we in­vest. I like to fo­cus on the things I can con­trol and so should you.


Retirees make a lot of avoid­able mis­takes with their in­vest­ments and sac­ri­fice pru­dent in­vest­ing by fo­cus­ing on div­i­dends and tax de­fer­rals, says Ja­son Heath. Heath also ad­vises tak­ing ad­van­tage of TFSAs, re­al­iz­ing cap­i­tal gains and con­sid­er­ing draw­ing...

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