Retirement planning can be divided into three distinct phases, based on your life stage. During each stage, there are specific investment and financial strategies you should consider to help you achieve your retirement goals.

Life Stage 1 – Building your retirement nest egg

• Start early to maximize the impact of tax-deferred compounding over time
• Catch up on any unused RSP contribution room as soon as possible
• Contribute earlier in the year or on a monthly basis to enhance growth potential
• Consider opening a spousal RSP to reduce future taxes

Starting early – the power of tax-deferred compounding

It's important to get an early start on building your retirement nest egg – whether you're saving through a Registered Retirement Savings Plan (RSP), Registered Pension Plan (RPP), or both.

The earlier you start, the greater the impact of tax-deferred compounding. Because any income earned within your RSP (or pension plan) accumulates tax-free until withdrawn. If possible, contribute the maximum every year, while catching up on any unused contribution room from previous years.

How you time your RSP contribution can also make a big difference. If you contribute $5,000 at the end of each tax year for 30 years, your RSP will be worth roughly $566,000, assuming an 8% annual growth rate. But if you contributed the same amount in monthly installments instead, your RSP would be worth approximately $587,000. And if you contributed the lump sum at the beginning of each tax year, your RSP would be worth about $611,000 – $45,000 more than if you contributed at the end of the tax year.

Reducing tomorrow's taxes – today

A spousal RSP is an excellent way to potentially reduce your future taxes. With a spousal RSP, the goal is to equalize retirement income streams between you and your spouse.

For example, if you have one retirement income of $100,000 and pay income tax at a marginal rate of 45%, you would pay $45,000 in tax, leaving you with $55,000. But if you had two smaller income streams instead, $50,000 each, you would pay tax at a lower marginal tax rate on each of the incomes, resulting in lower combined taxes. Assuming the tax rate is 35%, you would only pay $35,000, saving $10,000.

Life Stage 2 – Protecting what you've built and taking it to the next level

• Reduce risk and enhance return potential with advanced diversification strategies
• Rebalance your portfolio to ensure the optimum level of global diversification and sector diversification

Advanced diversification strategies

Diversifying your investments is a proven strategy for reducing risk and increasing return potential. One of the fundamental ways you can diversify your investments is by asset type – stocks, bonds and cash.

Stocks provide long-term growth potential, while bonds and cash provide a safety cushion.

But diversifying by asset type is just a starting point when it comes to properly diversifying your retirement savings. You should also consider other diversification techniques, including:

Global diversification. Studies show that a portfolio balanced between Canadian and global investments reduces risk and enhances return potential. With the elimination of the 30% foreign content limit in 2005, it's now much easier to increase your level of global diversification.

Sector diversification. Today, stocks tend to perform based on the industrial sector, regardless of international borders. Diversification by sector, in addition to international exposure, may enhance your opportunity for greater returns.

Life Stage 3 – Maximizing your retirement income

Consider alternatives to boost your after-tax income

Boosting your income

Getting the income you need from your retirement savings can be a challenge given the low interest rates currently offered by GICs and government bonds. Seeking higher income, retirees are increasingly turning to other investments, like corporate bonds, income trusts and dividend-paying stocks. The key is maintaining the right balance between secure investments and investments offering the potential for higher income.

Corporate bonds. Carefully selected high-quality corporate bonds can provide higher interest payments compared to a government bond, without substantially higher risk. Risk is determined by the credit rating of the issuer. A high-quality corporate bond issued by a well-established corporation may have a credit rating of “A” compared to “AA” for a government bond. A medium-grade corporate bond might have a credit rating of “BBB” but would most likely offer a higher interest rate to attract investment.

Income trusts. Like stocks, income trusts are publicly traded equities and should be considered part of the equity component of your portfolio. But unlike stocks, income trusts distribute most of the cash earned from underlying assets directly to investors. Income trusts can provide much higher income than bonds, but bear in mind the distributions are not guaranteed and can vary.

Dividend-paying stocks. You can boost your after-tax income with dividends from Canadian corporations, which are effectively taxed lower than interest income due to the dividend tax credit.

John Exler is an Investment Advisor with RBC Dominion Securities Inc. This article is for information only. Consult with your professional advisor before taking any action.john.exler@rbc.com905-895-2949