The March 1st deadline for a Registered Retirement Savings Plan (RRSP) contribution for the 2022 tax year is fast approaching. This year investors can contribute up to 18% of their 2022 earned income, subject to a maximum of $30,780. For earners in high-income brackets, the RRSP is a critical tool when it comes to reducing your tax burden.
In addition, Canadians can also make use of the highly versatile tax-free savings account (TFSA), which recently had its contribution limit for 2023 increased to $6,500. Those who turned 18 prior to 2009 and have yet to open a TFSA until now can contribute up to $88,000. The tax-free nature of capital gains, dividends, and withdrawals from a TFSA makes it a priority for many investors.
With these tools at your disposal, you may be wondering: "how should I invest?" A great way to create a low-cost, passively managed portfolio is via ETFs. Today, I'll be outlining the two main types of retirement-oriented ETFs that investors can use for the core of their portfolio. Read on to find out how to pick an ETF portfolio for retirement.
Retirement Investing: Some housekeeping items
For the purpose of this article, I will be sticking to Canadian-listed ETFs that trade in Canadian dollars (CAD). While investors can avoid the IRS' 15% foreign withholding tax on dividends in an RRSP if they hold U.S.-listed ETFs, this approach requires currency conversion.
Unless you're familiar with Norbert's gambit or invest with a brokerage that charges low currency conversion fees (like Interactive Brokers) the additional cost of currency conversion may not be worth the savings from holding a U.S. listed ETF in your RRSP.
Finally, the model portfolios I'll be covering today will use an 80/20 allocation of stocks and bonds. This is a fairly aggressive allocation that may not be suitable for all investors. Older investors may prefer a more conservative allocation like 60/40 or 40/60. Younger investors might ditch the bonds altogether.
Retirement Option 1: The Target-Date ETF
For ultimate simplicity, investors can hold a target-date ETF in both their TFSA and RRSP. These are all-in-one ETFs that provide investors with an automated portfolio of stocks, bonds, and cash that shifts over time to a more conservative asset allocation.
Picking a target-date ETF is as simple as figuring out the year you'd like to retire and picking an ETF with that year or one close to it in its name. For example, if I wanted to retire in 2050, I would pick the Evermore Retirement 2050 ETF (ERFO).
Currently, ERFO is 92.8% stocks, 6.9% bonds, and 0.3% cash. As the ETF approaches its target date, it will adjust its asset allocation on a "glidepath" to reduce volatility. This usually means increasing its allocation of bonds and cash and decreasing its allocation of stocks.
With target-date ETFs, the only thing an investor needs to do is make periodic contributions and reinvest distributions. That's it. There's no need to worry about adjusting your investment mix. It's as hands-off as it gets. The only downside is a slightly higher expense ratio compared to other options.
Evermore currently offers a suite of eight target-date ETFs in five-year increments. All eight ETFs charge a 0.35% management fee and have a target management expense ratio (MER) of 0.45%.
- Evermore Retirement 2025 ETF (NLB:ERCV)
- Evermore Retirement 2030 ETF (NLB:ERDO)
- Evermore Retirement 2035 ETF (NLB:ERDV)
- Evermore Retirement 2040 ETF (NLB:EREO)
- Evermore Retirement 2045 ETF (NLB:EREV)
- Evermore Retirement 2050 ETF (NLB:ERFO)
- Evermore Retirement 2055 ETF (NLB:ERFV)
- Evermore Retirement 2060 ETF (NLB:ERGO)
Retirement Option 2: The Asset Allocation ETF
The Evermore target-date ETFs are fairly new and are competing with a slew of asset allocation ETFs from providers like Vanguard, iShares, BMO (TSX:BMO), Fidelity, Mackenzie, Horizons, and TD (TSX:TD) to name a few. Since their launch in 2018, asset allocation ETFs have become highly popular with Canadian investors.
The current asset allocation ETFs all share some similarities, despite being from varying ETF providers. Common characteristics include:
- A 20-30% overweight to domestic Canadian equities, which is called a home-country bias. This helps reduce currency risk and volatility and improves tax efficiency.
- The remainder of the equity allocation is split between U.S., internationally developed, and emerging market equities based on market cap.
- The bond allocation usually consists of Canadian, U.S., and international aggregate (government & investment-grade corporate) issues of an intermediate duration.
- The asset allocation is rebalanced according to set absolute or relative percentage bands and payout distributions on a quarterly or annual basis.
- Expense ratios vary, but usually range from 0.15% - 0.25% and cover all the costs of the underlying ETFs.
In terms of construction, asset allocation ETFs are similar to target-date ETFs but do not adjust over time to be more conservative. An 80/20 asset allocation ETF will still be 80/20 a decade from now. Thus, investors must periodically swap them or add separate bond or cash ETFs to reduce volatility.
The following asset allocation ETFs fall into a "growth" category and are all 80/20 stocks/bonds. Many of these ETF providers also offer 100% all-equity, 60/40 "balanced", 40/60 "conservative", and 20/80 "income" variants. Be sure to check their holdings and not rely on the name, as there are some providers that use more unorthodox allocations like 90/10 or 70/30.
- Mackenzie Growth Allocation ETF (TSX:MGRW)
- Fidelity All-in-One Growth ETF (NLB:FGRO)
- Vanguard Growth Portfolio (TSX:VGRO)
- BMO Growth ETF (TSX:ZGRO)
- iShares Core Growth ETF Portfolio (TSX:XGRO)
This content was originally published by our partners at the Canadian ETF Marketplace.