During the last decade, the government, the financial sector, and the media have given great attention to RRSP’s and how to use them as a vehicle to save for retirement, yet people question whether or not they should hold their investments inside of an RRSP.
Frequent concerns include:
n The government will tax them all one day anyway.
n There is no place that I can invest and see the same returns that I am getting in my business.
n My business/orchard/farm is my RRSP.
n There are no additional funds to invest outside of the farm.
n I don’t trust government programs.
I am not going to try to rationalize the arguments for investing inside of an RRSP in this article; those have been, and will be, discussed at length again this RRSP season. Rather, it is worth considering the simple importance of investing appropriately outside of a farming or business operation.
It is critical to develop a diversified holding of investment assets. Business operators already hold a high percentage of their capital in hard assets. Land and buildings are a very good choice for a percentage of investment holdings for almost anyone, however in business, often 100 per cent of the assets are tied up in the operation. Consider for a moment some advantages of developing investment accounts outside of the business:
n Diversification of assets. What if the time to leave a business arrives and part or all of it needs to be sold? Suppose at this time prices are in a prolonged five- to 10-year slump. Would your capital be able to stand the erosion of depressed prices?
n Nothing is too big to fail. A few sustained hits to many business operations would make them less than viable. Upon exit, what percentage of the capital would actually be realized from an operation after paying out all mortgages and obligations?
n The amount of assets required to fund a retirement are significant (depending of course on the lifestyle chosen). More than one client has commented on their surprise at how little capital was left over after the re-payment of debt and payment of tax following the sale of an orchard.
n What if children take over the business? Will the operation have the ability to sustain two to three family incomes? What income streams will generate a retirement income?
It is prudent to consider the reasons for investing outside of a business or agricultre operation. Developing outside investment accounts utilizes the simple principle of diversification. Use an RRSP for tax sheltered growth, or don’t. Buy a government of Canada bond or get in the stock market. Invest in a program that you are comfortable with, but build assets in more than one place. If done properly and consistently, over time you will be glad you did.
Kirbey Lockhart is an investment advisor with RBC Dominion Securities Inc. This article is provided for information purposes only. Please consult with a professional advisor before implementing a strategy.