Each one of your goals (saving for a down payment on a home, RESPs) should have its own asset allocation. If you have only a single retirement account it’s pretty straightforward to select your investments and keep them balanced in the future. But, investors are most likely to have multiple accounts for their retirement goals.
Many of us may have some combination of RRSPs, LIRAs, TFSAs, company defined contribution pension plans, non-registered investments and, if you’re married you double some, or all, of these accounts.
To manage them effectively, it’s important to treat them as a single portfolio.
First determined the optimum asset allocation of stocks and fixed income that reflects your needs for returns balanced against your tolerance for risk. Then, take a look at all your retirement accounts together.
Justin Bender of PWL Capital created a custom spreadsheet to help track asset allocation across multiple accounts. Download the spreadsheet to Excel and use the instructions here.
Select your investment types
Work out the percentage of each investment type you want to hold in each asset class e.g. if your fixed income allocation is 30% you might want to have 20% in a corporate bond and 10% in short-term bond ETFs.
Keep your number of individual holdings to a minimum. Holding a lot of investments within multiple accounts can become problematic.
Strategically fill each account
It certainly simplifies things if you hold all the same investments in each of your individual accounts. But, rather than trying to duplicate your asset plan in each investment vehicle, you should ideally consider investing each asset class in the most tax-efficient account:
- Bonds, GICs, REITs go in your RRSP or TFSA
- US and global equities are best in your RRSP
- Canadian stocks are the first choice for a non-registered account
You can start with the account that has the most limited choices such as a defined contribution pension plan, or an account that has no more contribution room (LIRA). If these accounts are small, you may limit them to just one asset class or even a balanced fund.
Your largest accounts (e.g. RRSPs) will likely need to hold two or more investments (funds) from each of your asset classes so you can do all your rebalancing in just one or two accounts through your future contributions.
Asset allocation in multiple accounts: Two examples
Many variables make each investors profile unique, but here are two basic examples:
1. Felicity is 26 years old. She has a defined contribution pension plan through her work. She also has an ETF portfolio in a self-directed RRSP. She is comfortable with an asset allocation of 20% fixed income and 80% equities.
- Pension plan – $5,000
- RRSP – $20,000
Asset Allocation: Fixed Income 20% or $5,000
- Canadian Equity 40% or $10,000
- US Equity 20% or $5,000
- Global Equity 20% or $5,000
Defined contribution plans allow you to invest in your own selection of several mutual fund products. Pension funds are usually set up with insurance companies and – although your employer can negotiate reduced fees – the MERs will be on the high side. The lowest fees will be in money market and bond funds so Felicity will hold her entire fixed income allocation in a Canadian bond fund.
Her RRSP holds ETFs in the other asset classes. If her pension plan bond allocation becomes over weighted, she can then choose to add a Canadian equity fund, or switch to a balanced fund and make changes to her RRSP accordingly.
2. Mel (51) has a RRSP and LIRA. His wife Clara (49) has her own RRSP. They each have a TFSA and have a joint non-registered trading account. Their asset allocation is 50% fixed income and 50% equities.
- Mel’s RRSP – $200,000
- Mel’s LIRA – $120,000
- Mel’s TFSA – $50,000
- Clara’s RRSP – $60,000
- Clara’s TFSA – $50,000
- Joint non-reg. – $20,000
Combined asset allocation: Real return bond 30% or $150,000
- Short term bond 20% or $100,000
- Canadian equity 25% or $125,000
- US equity 15% or $75,000
- Global equity 10% or $50,000
Here’s what their investment may look like in their combined accounts. The rebalancing will be maintained through new contributions (excluding Mel’s LIRA).
|Real return bond||$120,000||Mel’s LIRA||30%|
|Real return bond||$ 30,000||Mel’s TFSA|
|Real return bond||$ 30,000||Clara’s TFSA|
|Short-term bond||$100,000||Mel’s RRSP||20%|
|Canadian equity||$ 35,000||Clara’s RRSP||25%|
|Canadian equity||$ 20,000||Mel’s TFSA|
|Canadian equity||$ 20,000||Clara’s TFSA|
|Canadian equity||$ 20,000||Joint non-registered|
|US equity||$ 50,000||Mel’s RRSP||15%|
|US equity||$ 25,000||Clara’s RRSP|
|Global equity||$ 50,000||Mel’s RRSP||10%|
The advantage of consolidating asset classes is it allows you to choose the lowest cost and most tax-efficient investment for each account. This strategy obviously can result in different returns, and even losses, in each separate portfolio, but you need to look at the big picture.
All of your retirement accounts need to be working together and working towards the goals you have set.