Investment for Canadian Employees PART 2 – Pension

hello. This is Miki’s Honey, MikiHoney.

Canadian employees must make good use of their pension and make financial investments. The pension system is a system in which the government creates various institutional mechanisms to help citizens invest well and live well in retirement.

It is a system that has many benefits in many ways, but after experiencing the turbulence of life in Korea, it is really unfortunate that I did not use it much in the beginning due to suspicion and distrust of this system.

Even in financial management and investment using pensions, you need to invest differently depending on various cases, but for example:

• If both spouses are employees
• When the Marginal Tax bracket is low
• If you are collecting down payment to buy a house, etc.

Here, I will briefly explain the big picture.

RRSP, RPP

First, if we look at the types of traditional pension investments, the two biggest ones are RRSP and RPP .

RRSP is a pension account operated by individuals, and RPP is a pension account subscribed to by a company.

There are two types of RPP : DB (Defined Benefit) type and DC (Defined Contribution) type.

If the company’s pension type is DB, you can just stick with it for a long time . Then, when you retire, the company will take care of your money.

In the case of DC , the company and I save money together in the company pension account and invest this money in several designated investment products .

It would be too complicated to explain in detail, so I would just recommend that if your company has a pension program, you contribute as much as possible. Company pension programs have many advantages, including low fees and good investment products prepared in advance.

If the company does not have a pension program, the individual must invest in an RRSP account directly. Of course, you can make additional investments in RRSP even if you have a company pension program.

RRSP and RPP have limits on the amount you can put in per year and deduct taxes for the amount you put in. If the total amount contributed to RPP for one year does not exceed the limit, you can add more to RRSP.

How do I invest my pension?

So how should you invest your pension?

Because pensions are ultra-long-term investments, it is appropriate to invest aggressively. I think 100% stock investment is okay. Even if stocks fall, they will rise again within 10 years.

Instead, we recommend an Index ETF that tracks the entire market rather than investing in individual companies. Personally, I prefer the US S&P 500 Index Unhedged ETF .

Advantages of the S&P 500 Index Unhedged ETF include :

• A huge number of passive investment funds that track this index provide liquidity every month. In particular, many pension investors in the U.S. buy money consistently every month, so money does not drain easily.
• The larger the scale, the lower the fees. The management fee is about 0.08%, so you can think of it as almost no fees.
• When the global economy becomes unstable, stocks fall, but the US dollar rises relatively, which has the advantage of protecting profits to some extent.
• Bad companies are periodically expelled from the S&P 500 list and new, performing companies are added, causing the index to continuously rise.

If you invested $500 per month in S&P 500 Index EFT starting in 2000, you would accumulate $500,000 in pension after 23 years.

Even though there is a financial crisis or a corona crisis in the middle, it still amounts to $500,000.

If you expect to retire in 10 years, if you invest conservatively with a 6% target, you will retire with 1M in your pension account.

I also bought individual stocks with good prospects and mixed bonds considering the economic situation, but in all cases, I was unable to beat the long-term investment in the S&P 500.

In the end, I concluded that S&P 500 is the answer when it comes to long-term investments and pension investments . Individual stocks fluctuate a lot, and although there is a profitable section in the short term, it was very difficult to find the right moment to sell.

So, I always hold more than 50% of the entire portfolio in S&P 500 Index EFT and distribute the remainder in various ways, but it seems that the best return is when 100% is all S&P 500.

In the future, I’m planning to invest 50% in S&P 500, 30% in Nasdaq 100, and 20% in bonds, but as time goes by, I’m sure I’ll regret not investing in S&P 500 again.

However, in long-term investing, it is much more helpful to avoid major risks that will come only in 10 or 20 years than to make maximum profits in the short term.

If you avoided risk for only about 6 months during the 2008 financial crisis or the 2019 pandemic crisis, you can feel comfortable even when it falls and make greater profits by adjusting your portfolio again at the appropriate time.

If you were 100% invested in stocks during such a crisis, you would take a direct hit when they fell, become anxious, and make the mistake of selling before they went up.

For employees, peace of mind is very important when investing in stocks. Investing in stocks is important, but stability in work life is more important.

Next, let’s talk about investing in your home.

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