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Portfolio First Aid

Five common RRSP pitfalls Add to ...

Warren MacKenzie has seen a lot of investment portfolios up close. He is the president and CEO of Weigh House Investor Services, a Toronto-based firm that specializes in providing second opinions on portfolios.

What crosses his desk is not always pretty. In an e-mail, he wrote: "Believe it or not, I recently did a review for an 80-year-old person who had 75 per cent of her portfolio in fixed-income investments, which seemed okay until I looked and saw the bonds had maturity dates ranging from 2018 to 2039!!!!!"

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To help navigate the tricky shoals of investing and RRSPs, several experienced financial advisers suggest things investors should avoid.

1. Avoid relying on just one opinion The anecdote provided by Mr. MacKenzie alerts us to the value of obtaining second opinions on our investments and registered plans. For a start, you can talk to friends and relatives who are knowledgeable about investments.

Then there are financial journalists and commentators who take readers' questions: an example is Gordon Pape. He responds to inquiries in the Question and Answer section on his website at www.buildingwealth.ca. Or you can use a service like Mr. MacKenzie's, which reviews portfolios for a fee.

2. Avoid saving too much in an RRSP "The biggest problem I face with many clients is an RRSP or RRIF that has grown to be too big," says Angelo Vicere, branch manager and senior financial adviser with Assante Capital Management Ltd. in Hamilton, Ont. "A $700,000-to-$2-million RRSP may sound great until you realize that the money has to be taxed at some point."

A retiree with such a large plan would be in the 43-per-cent tax bracket and Old Age Security benefits would get clawed back. Moreover, heirs (excluding spouse) would get, after tax, just a little over half of what's left in the registered retirement income fund.

In the accumulation phase, allocate some of your retirement savings to unregistered accounts and tax free savings accounts (TFSA). In retirement, Mr. Vicere suggests splitting pension income, buying life insurance to pay estate taxes, "meltdown strategies" involving flow-through shares and other measures.

3. Avoid having too many RRSPs David Shymko of Macdonald, Shymko & Company Ltd. in Vancouver suggests not having too many plans. "Don't open another new account," he recommends. "In fact, if you have several plans already, try to consolidate them into one plan."

Fees are likely higher than with a single plan. And having your financial assets spread over several plans can result in a disorganized investment strategy. Multiple positions may leave you unaware of what and how much you own, which can lead to duplication and inappropriate asset allocations.

Also, a consolidated account will make tasks such as rebalancing and reporting of taxes simpler and result in fewer errors.

4. Avoid waiting until the last minute Doing so "creates the tendency to make an emotional decision or to 'park' the contribution for too long," notes Kirk Polson, an investment adviser with Markham, Ont.-based Polson Bourbonniere Financial (a member of Dundee Securities Corp.). He suggests making contributions earlier in the year to get the compounding of tax-sheltered returns started sooner. Also consider contributing on a regular basis throughout the year, a savings technique known as dollar-cost averaging.

"Just as bad is procrastination and not making a contribution. If you miss the deadline thinking, 'I'll catch up next year,' you'll delay the tax-free compounding of returns. Over time, that can significantly reduce the size of your retirement nest egg."

5. Avoid the risks of holding your mortgage in an RRSP "I'm sure there is more temptation to initiate holding one's mortgage inside their RRSP these days with interest rates being so low," comments Preet Banerjee, whose credentials include senior vice-president at Oakville, Ont.-based Pro-Financial Asset Management and author of RRSPs: The Definitive Book On Registered Retirement Savings Plans .

"But the rules of diversification should still be adhered to. You also don't want to violate your asset allocation. So if your mortgage is more than 25 per cent of your RRSP, you may be taking on too much risk. Moreover, if you miss mortgage payments, your RRSP trustee could be forced into a power of sale."



. Weigh in on whether you would stash some extra money into an RRSP, RESP or a TFSA.

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