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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
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Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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I am about to recieve a $200,000 severance/salary continuance

Resolved Question:

I am about to recieve a $200,000 severance/salary continuance package. I have approx $60,000 unused contribtion room in my RRSP and I do not have a company funded pension.
What is the best way to invest this money?
Submitted: 1 year ago.
Category: Finance
Expert:  Rakhi Vasavada replied 1 year ago.
Dear Friend,

Hello and welcome. Thank you for using Just Answer.

Let me try and throw some light on your question. In my opinion, you should use up the $60,000 unused contribution room in your RRSP.

Having said this, the rest of the investment strategy would depend upon your risk appitite and risk profile. Let me try and throw some light on this as well and give you some options.

I do not know your current cash flows and your current savings. I am making some suggestions based on some presumptions.

You can equally divide the remaining 1,40,000 in the following.

Corporate Bonds -- Consider buying some corporate bonds, which are somewhat riskier than government bonds but pay a higher yield.

Guaranteed Investment Certificates (GICs) -- It’s impossible to lose money in a GIC -- at least, if you don't factor in inflation. These investment vehicles are protected by the Canadian Deposit Insurance Corporation, so if a bank goes bust, your principal will be returned. You don’t want to put all your money in a GIC, though, as they offer very less returns -- comparatively.

Annuities -- Insurance companies offer annuities, which are investments that, in retirement, pay set monthly payments for life. It’s a great option for people who are worried about their cash flow, but it can be an expensive one. Fees are typically higher than what you’d pay on a mutual fund, and your money won’t get as great of a return as it would if you invested in the market yourself. But your cash is protected and you do get a regular cheque in retirement, which, to many people, is worth the extra costs.

The above mix -- i.e. filling up your RRSP contribution room + dividing the remaining money in to three options above is intended to spread risks equally and ensure balance of risk.

I am sure this would help.

You may please leave a positive rating if this helps as this is the only way we get credited for assisting you. Alternatively please feel free to reply with further queries if you have and I would be more than happy to assist you further.

Warm Regards
Customer: replied 1 year ago.


Good morning,


 


I appreciate your response and your investment tips for the balance of the package. I would however, like to better understand why you think I should put the $60,000 into my RRSP?


Thank you

Expert:  Rakhi Vasavada replied 1 year ago.
Dear XXXXX,

Hello and welcome. Thank you for your follow up question.

I suggested to use up contribution room because of the tax benefits that you would receive. $60,000 is nearly third of your amount. By using up the contribution room, you will realize immediate tax benefits at a time when your income is generally highest. The total amount of your annual contribution can be deducted from your gross income at tax time, reducing the amount you pay in income tax that year.

Further to this,income earned in your RRSP is not taxed until it is withdrawn. While your investments sit in your RRSP, their growth is tax sheltered and so the total value may grow more quickly AND the time you begin to withdraw the funds at retirement, you will probably be in a lower tax bracket than during your earning years. Funds withdrawn at that time will benefit from this lower tax rate.

I am sure this would help.

You may please leave a positive rating if this helps as this is the only way we get credited for assisting you. Alternatively please feel free to reply with further queries if you have and I would be more than happy to assist you further.

Warm Regards
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 3929
Experience: Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years