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Mike Reilly, B. Sc.

Financial Security Advisor
Investment Representative
Freedom 55 Financial

Cross train your portfolio

In my younger days I was a competitive rower. Most training days (which most months was every day) consisted of high volumes of on-the-water kilometers for me and my teammates. Success in rowing comes from doing the same thing over and over again with intensity and precision. The common thinking in those days was to row 20 to 25 kilometers every day. This was supplemented with weight training of rowing specific exercises such as barbell cleans and bench pulls.

The result was we all were very good at the rowing stroke, but not much else. Few were the days when someone in the boat wasn’t suffering from a muscle strain or a ligament tear. Friendly games of soccer or flag football resulted in days of soreness and hobbling. This group of fit young men were often no healthier than a bunch of 80-year-olds.

The same circumstances were shared by other high performance athletes. Long distance runners (who did nothing but run), tennis players (who did nothing but play tennis), swimmers (whose only training was in the pool) and many others were usually managing some type of injury in a part of their body that was not exercised to the same level as their “sport muscles”. It wasn’t until years later that the concept of cross training was developed.

Now most Olympians and professional athletes balance their training with a variety of different exercises and activities that supplement their chosen sport. Track athletes arrive at meets having run more miles, but also trained in karate. Football players reduce injuries through yoga practice and downhill ski racers play squash in the off season to improve reaction time. Boxing, cycling and martial arts have become integral parts of nearly every high performance athlete’s training regime. Cross training allows them to complete injury free for longer than ever before.

The same need exists to “cross train” your financial security portfolio. In an era of market volatility and international venture opportunities, putting all your money in a single investment vehicle can leave you exposed to potential economic “injury”. But you don’t have to be a Bay Street big wig or the head of a multinational corporation to expand beyond your bank account to a broader cross trained portfolio.

Here are three key savings solutions that you may wish to be part of your cross trained financial security plan:

Registered retirement savings plan (RRSP)

As soon as you begin your working life, you may want to start a registered retirement savings plan (RRSP). It’s one of the most tax-effective ways to save for retirement. You’re allowed to contribute up to 18% of your earned income from the previous year to a maximum of $23,820 for 2013. (If you’re a member of a group pension plan, your contribution room is reduced by your “pension adjustment,” an amount you’ll find listed on your T4.)

Contributions are tax deductible, meaning you may be able to receive a tax refund while building your savings. Plus, you can super-charge your RRSP savings by putting that tax refund back into your RRSP as soon as you receive your cheque.

It is important to note that an RRSP is not one specific investment vehicle. Many different investments and/or combinations of investments can be held inside an RRSP. This provides a further opportunity to hold money in different “accounts” with different timeframes and risk levels.

Tax-free savings account (TFSA)

TFSAs are the relatively new kid on the investment block in Canada. Introduced by the federal government in 2008, TFSAs let you save up to $5,000 a year ($5,500 starting in 2013) and, while contributions aren’t tax deductible, there’s no tax payable on investment growth and withdrawals are tax-free. Similar to an RRSP, a TFSA can hold different types of investments depending on your ultimate use of the money depending on time horizon and risk tolerance.

A TFSA is an ideal savings tool for both long-term and short-term goals such as a vacation or home renovation. Also, for younger Canadians who haven’t yet reached their earning years, a TFSA is a great way to start saving for the future.

Registered education savings plan (RESP)

If you have kids, an RESP should be considered. It’s a special savings account that lets you save for your kids’ education after high school. Income earned inside the plan accumulates tax-free until it’s withdrawn and then it’s taxed in the hands of the child (meaning usually no tax is payable).

Not opening an RESP to save for your child’s education means you’re also turning down free money. The Government of Canada will match 20 per cent of your annual contributions up to a maximum of $500 per year to a lifetime maximum of $7,200 per child. That’s a big boost in savings!

Like the NHL forward who strengthens his core through Pilates to reduce on-ice injuries, accumulation of wealth also needs some protection in place. TFSAs and RRSPs can help build wealth but you also need to think about protecting your financial future. Here are three insurance solutions designed to help ensure you have a better chance of reaching your wealth goals.

Life insurance

Pure protection for premature death is known as temporary or term life insurance. This provides a lump sum of capital to your beneficiaries to look after your obligations. Term insurance is very good for providing large death benefits, and at some future point in your life, you will probably own substantial amounts. If you’re married, have kids or own a business, you should consider having a life insurance policy in place in case anything happens to you. How much you need depends on your personal situation but it should be enough to cover any debts you may have (including your mortgage) and help cover your family financially for as long as possible.

Tax exempt permanent whole life insurance also provides a lump sum benefit in the event of death but also allows for the buildup of a cash value inside the policy that can be drawn upon during your life. The values may be used in the medium to long term for liquidity purposes, such as helping you through a financial emergency or to take advantage of a financial opportunity without collapsing the policy. You also may decide to use some of the money you accumulate in this plan to help you slow down or retire early. Strategically, this latter opportunity makes good planning sense because using the money for early retirement will allow more time for your RRSPs to compound.

Critical illness and disability insurance

It’s important to not only have life insurance, but to help ensure you’d be financially protected should you ever become unable to work due to illness or injury. Would your workplace benefits provide you with adequate coverage? If not, what would happen to you and your family?

Critical illness insurance can help pay the costs associated with a life-altering illness such as cancer or a stroke. More and more people are surviving life threatening illnesses now but the economic toll they take on the family through lost wages and travel expenses can often bankrupt them. With critical illness insurance you receive a lump sum payment if you become critically ill and you decide how you wish to spend the money.

Disability insurance protects you from a potential loss of income due to injury or illness. You receive a recurring monthly payment to cover ongoing financial costs. Even if you have workplace group disability benefits, it’s often wise to have your own personal policy to provide you with additional coverage.

As you can see, simply spending less than you earn and saving the surplus may not be enough on its own anymore. Putting those savings into a broader portfolio of financial solutions will go a long way to helping you get where you want to go.