Rate of Return: 9.4%
It used to be that Canada had five seasons: spring, summer, fall, winter, and RRSP. During January and especially February the media would be awash with ads urging everyone to make an RRSP deposit before the March 1 deadline and get a tax break for doing so.
What we’re seeing now is only a shadow of what used to be. Financial institutions still want your money but the big emphasis on RRSPs has disappeared. We’re back to four seasons.
That does not mean retirement savings is any less important. If anything, it’s even more so. According to recent data from Statistics Canada, about 60% of working Canadians do not have an employer pension plan. They’re on their own when it comes to putting aside money for retirement.
RRSPs offer two advantages. All the money you contribute is tax-deductible up to the limit. This year it’s 18% of your earned income in 2024 to a maximum of $32,490. The second benefit is that all the income you earn within the plan is tax-free until you make a withdrawal. At that time, the amount coming out is taxable at your marginal rate.
Properly used, an RRSP can generate an impressive retirement fund over the years. In my book RRSPs: The Ultimate Wealth Builder, I point out that it is possible to build a portfolio worth several million dollars if you start early enough and contribute regularly.
Of course, as with any investment, RRSP assets must be allocated wisely and monitored on a regular basis. To help with that process, I launched an RRSP model portfolio fourteen years ago, in February 2012, and have monitored it twice a year since.
The portfolio has two main objectives: to preserve capital and to earn a higher rate of return than is available from a GIC. The original value was $25,031.92.
The portfolio contains a mix of ETFs and stocks, so readers who wish to replicate it must have a self-directed RRSP with a brokerage firm.
Comments: The portfolio was up 7.4% in the latest six months. Every security except XSTP showed a profit. The biggest gains were posted by Manulife and the BMO S&P/TSX Banks Equal Weight Index ETF.
Over the 14 years since the portfolio was launched, we have a total return of 250.6%. That’s an average annual growth rate of 9.37%, well ahead of our target.
Changes: The portfolio is performing well and has significant downside protection through its holdings in XSTP and CSAV. But those two securities are delivering minimal returns. Therefore, I am going to sell XSTP and replace it with the iShares Core Canadian Corporate Bond Index ETF (TSX: XCB). I expect this will give us a somewhat better return with a minimum amount of added risk.
We will sell our XSTP position for a total of $6,180.37, including retained earnings. We’ll buy 300 units of XCB at $20.40 for a total cost of $6,120. We’ll add the difference of $60.37 to cash.
We’ll also buy another 10 shares of Fortis for a cost of $739.90, which will increase our share count to 80. We’ll use the retained earnings of $682.89 and take $57.01 from cash to finance the trade.
The new cash balance (including retained income) is $2,852.74. We will move it to the Kawartha Credit Union High Interest eSavings Account which is paying 2.25% on RRSP accounts.
Here is the revised portfolio. I’ll review it again in August.