Throughout your career you put a lot of energy into saving for retirement. So when the time comes to dip into your RRSP, make sure you get the most out of it! It's important to pay attention to all the different fees that can shrink your nest egg. Here are 6 tips to help you pay the lowest fees possible during retirement, so you can get more out of your hard-earned savings!
01Make a list of all fees that you pay
To pay the fewest fees possible, you need to start by knowing what you are paying. The prospectus of each of your funds will provide you with all the information you need to correctly determine the fees you need to pay. If you don't have the prospectus, contact your financial institution.
What is the Management Expense Ratio? Are your funds redeemable at all times? Are there redemption or withdrawal fees? What are the transaction fees? All this information will help you determine where you can save on fees as much as possible so you can hold on to more of your money. You can even compare with similar products from other financial institutions. You might be in for some surprises!
02Redeem your funds at the right time
Although purchase fees have fallen out of favour on the Canadian investment scene, the vast majority of funds have fees payable upon redemption, which come into effect whenever you withdraw money.
Fortunately, these fees quite often decrease progressively as the years go by. That means it might be worth your while to hold on to certain funds and make withdrawals from other holdings to avoid paying fees.
Otherwise, if this type of fund no longer meets your investment needs, you can always convert it to a different fund in the same family, without incurring any fees. This way you can rebalance your portfolio and it won't cost you a cent! Sometimes, all you have to do is stick with your investment horizon objectives and you will pay nothing. If your options do not look clear to you or you don't know where to start, don't panic! Plan a meeting with your personal finance expert. He or she will help you understand your options and choose the best game plan for your situation.
03Avoid too many transactions
As is sometimes the case with your financial institution, services charges are levied when money is withdrawn from your funds. If these withdrawals are too frequent, the numbers add up and start eating into your savings.
Take a planned approach to your withdrawals so as to minimize the total number of transactions. Withdrawing larger amounts less frequently is a simple strategy to reduce these costs.
If this is not possible, make sure to choose a fund that meets your retirement needs and that features lower fees. There'll be more money for you at each payment!
04Reduce your management fees
All funds have a management expense ratio (MER) which varies between 1 and 3% of your portfolio, depending on the type of fund and its annual recurring costs. When your portfolio reaches maturity when you retire, these fees can be substantial and they won't exactly be contributing to higher returns. However, many funds offer reduced management fees as a function of portfolio size. By knowing its total value, the fees you are paying and those of competing institutions, you can easily negotiate a reduction in your management fees by speaking with your personal finance expert.
A reduction of only 0.5% can mean thousands of dollars in savings, depending on the invested amounts. So don't hesitate to bring along a prospectus from a competitor and insist on an equivalent rate.
05Withdraw capital before returns
You may also have to pay tax when you withdraw money. Some funds let you withdraw capital before returns, however. This can be very useful if you are retiring gradually or if you have other sources of revenue. You can withdraw the returns later, defering (once again) the tax payable and avoiding a big tax bill right at the start of your retirement!
06When it comes to withdrawals, be strategic
Even when you've reduced fees at source as much as possible, you can still save by making withdrawals in a strategic manner. You can start by making withdrawals from funds that have the highest management fees compared with those delivering similar returns. At the same time, let your funds reach maturity to avoid stiff withdrawal fees.
By paying particular attention to the order of your withdrawals, you increase your chances of holding on to those that cost less while you unload the most expensive! It's one more topic you may want to consult your personal finance expert on if you have any concerns.
Fund related fees can cut into your assets in a substantial way, but now that you are aware of the fact, you are in a position to reduce those costs significantly. Every investment portfolio is different and, by identifying the particular fees you are paying, you'll be ready to look at your best options for your quality of life and your peace of mind. The ball's in your court!