If you're not part of a workplace pension plan, you're likely facing a retirement challenge. Employer pensions – whether they are group RRSPs, defined contribution plans or the Cadillac of all pensions, defined benefit plans – are the backbone of retirement savings for many Canadian workers.
But they're certainly not the norm. Only about four in 10 workers are members of a plan, according to a 2015 report from Statistics Canada.
So a majority of working Canadians need to save more, do it sooner and likely take on more risk in their retirement portfolios, says Cory Papineau, a certified financial planner with Assiniboine Credit Union in Winnipeg.
"To keep the same standard of living in retirement, it is estimated that you need about 11 times your final salary at age 65," Mr. Papineau says, citing a recent report by Aon Hewitt.
The first step for those without pensions is maximizing contributions to a registered retirement savings plan. The RRSP is essentially your own private pension plan.
The investment strategy should not differ much from that of an actual pension plan, says portfolio manager Anthony Mazza, vice-president of Goodreid Investment Counsel in Toronto.
Many people are surprised that the asset mix of a typical pension fund is heavily weighted in equities, he says. In addition, bond yields are too low to meet obligations to retiring members, so pension funds also look to alternatives such as real estate and infrastructure, which offer higher yields.
Retail investors seeking to emulate this strategy can buy real estate investment trusts (REITs) and infrastructure-focused exchange traded funds (ETFs) for their RRSP. Both asset classes tend to have stable values, though generally not as stable as bonds (and certainly not as stable as GICs). But real estate and infrastructure pay more for that additional risk in the form of fairly consistent distributions north of 3 per cent.
As for the choice of equity investments in an RRSP, experts advise keeping it simple. If you're just starting out, consider three low-cost ETFs with about half their assets in the U.S. stock market and the other half split between Canadian and global equities.
With age and more money in the retirement nest egg, try a "core and explore" strategy "where you have a core that is the bedrock of your portfolio – those three ETFs – and then you supplement them with about four or five stocks you're comfortable investing in," Mr. Mazza says.
When selecting individual stocks, investors can choose small-cap companies that can provide a boost of growth to a portfolio – albeit with more risk. Or they can select large, blue chip companies – the big banks, for example – with long histories of paying steadily rising dividends. What's important is investors do their homework or seek assistance from an adviser first.
And don't overlook tax-free savings accounts (TFSAs). "If you make less than $50,000, it might make better sense to maximize your TFSA contributions" rather than add to RRSPs, Mr. Papineau says.
This is because the potential tax savings from RRSP contributions may be muted, depending on your income. The initial tax refund is worth less for people with lower incomes. And perhaps more importantly, the tax rate on withdrawals in retirement could be higher than the deferred tax rate on the original contributions. That means you'd end up paying more tax, which runs counter to the whole reason for making contributions to an RRSP in the first place.
In contrast, growth and withdrawals from a TFSA are tax-free. So while contributions are made with after-tax money, TFSAs can provide advantageous tax-free cash flow in retirement to go with Old Age Security and Canada Pension Plan benefits and help reduce any clawback on them.