Question
My wife and I have $180,000 in an RRSP with our bank and another $175,000 in an RRSP with an insurance company. Our insurance company’s RRSP holds some sort of investment that ensures we don’t lose our money. It has a basket of 10 mutual funds with MERs ranging from 2.5% to 3.99% and all of them come with trailing/deferred sales charges. But this investment has not brought a penny for years. We are 54 years old and would like to see positive growth. Any suggestions?
Answer
Buying insurance can be difficult. To be able to drive on the road, you must have it in your car. You really should have this in your life if you have a family. But does it make sense to insure your investment at all? Insurance comes at a cost and you need to decide if it’s worth the price.
I’ve been thinking a lot about cost-benefit calculations in insurance lately. Last week I contacted my insurance broker and asked her for a quote for additional insurance. She came back with a surprising answer: If I changed my policy, it would mean a 20% increase in premiums. Ouch. This extra insurance I was looking for just wasn’t worth the price in my opinion.
Simplifying the segregation of funds
The product you are talking about is called a segregated fund, and its merits have been hotly debated for years. These funds are similar to traditional mutual funds in that they hold a wide range of securities. There are other differences as well, but the most important one for you is that they are sold by insurance companies and have certain protections built in. For example, your ‘seg’ fund has a ‘maturity guarantee’, which means you’ll get a certain percentage of your money back at maturity, regardless of how the market performed. The fund may also include a guaranteed death benefit or a creditor protection feature.
However, this additional protection comes at a price, and the user pays a higher management expense ratio for it. This is certainly one of the reasons why your fund “hasn’t made a penny in years.” The question is, do you really need this insurance?
Multiple ways to manage risk
A segregated fund is one way to protect you and your wife from the risk of not having enough money in retirement. But there are many ways to manage risk – such as investing more of your portfolio in boring old government bonds. Diversifying your portfolio by region, sector and asset class, perhaps including real estate, are additional options to consider. You can also choose to work longer if your savings aren’t large enough to support your retirement goals. After all, you’re both only 54, so you have more time to weather market volatility than if you were 20 years older.
People often forget that you don’t need access to all your retirement savings the day you stop taking a paycheck. You need income to help you buy groceries, but that can come from bond income or from selling a bond mutual fund or ETF. The idea is that you shouldn’t have to cash in your mutual fund when its value drops because you have other assets to fall back on while you wait for the stock market to recover.
Finding a great financial advisor
You currently have almost $400,000 saved between two RRSPs, so you shouldn’t have a hard time finding a fee-only financial advisor who will take you on. There are two reasons why I think you should seek professional help with this matter.
First, you will benefit from having someone help you get out of the segregated fund. Calculating how and when to sell at the lowest cost will require some math. This is because there may be a penalty for withdrawing early, you may also have to pay a back-end fee (also called a deferred sales charge) and you won’t be eligible for the guarantee because you won’t be keeping your money in the fund until maturity. A great financial advisor will take all of these variables into account and tell you whether to make the decision and sell now or wait a few more years to avoid penalties and final charges.
The second reason I think you should consider paying an advisor is that you need to create an overall investment plan. This requires taking a step back and looking at your goals across a broad range of areas – home, travel, career, family and, of course, retirement. You then need to develop an investment strategy that will help you achieve these goals. As per my comments above, this would include an assessment of your risk tolerance, both financial and emotional, and a plan to manage it. Of course, you can do this work yourself, but you may not have the time or inclination.
You’re right to wonder whether a segregated fund is right for you, or whether the price of this type of insurance coverage is simply too high.
