You: Beyond RRSPs

You’ve maxed out your RRSP contributions and still have dough to invest. Now consider these investment alternatives for entrepreneurs

Written by Jennifer Myers

Congratulations. You’ve maxed out your RRSP contributions and still have dough to invest. Now consider these investment alternatives for entrepreneurs.

Segregated funds

Don’t want to take unnecessary risks with your nest egg? Think segregated funds. “Seg funds” are essentially life insurance contracts that invest your principal in mutual funds, but guarantee the return of at least 75% of your principal at the end of the contract period (usually 10 years). If you die, your beneficiary receives the guaranteed amount or the cash value of the fund, whichever is greater.

Because seg funds are considered insurance rather than an investment product, your cash is secure from creditors, unless the funds were purchased in the 11th hour. Plus, some seg funds allow you occasionally to lock in your gains. While this “resets” your guaranteed principal amount, it also resets the clock on your contract term.

Still, you pay for that protection. Management fees typically run about one to three percentage points higher than what you would pay for regular mutual funds.

Real estate

Real estate offers you the diversification you need and steady returns that can build wealth to cushion your golden years.

According to Investment Property Databank, a U.K.-based research firm, the average return (appreciation plus income) from Canadian real estate in 2004 was 12.9%, up from 8.2% in 2003. Retail property was the best-performing sector, with average returns of 16%, while residential real estate generated just 6.1%.

However, the wisdom of buying property depends on ensuring the cash generated is significantly higher than borrowing costs, says Terry Greene, a financial planner at MSC Financial Services Ltd. in North Vancouver.

Location still rules in real estate, so buy in a high-quality neighbourhood. Because single-tenant properties pose the greatest risk, look for fully occupied, mature commercial properties with multiple tenants, such as a retail centre in a suburban area or a building in a busy office park.

It is easy to overstack your portfolio with real estate, warns Tina Di Vito, a vice-president of retirement and tax planning with BMO Nesbitt Burns in Toronto. She suggests limiting property holdings to 10% of your portfolio.

Universal life insurance

Insurance might not be top of mind when it comes to your investments, but universal life is a creditor-proof, low-risk way to ensure you and your loved ones are protected in the event of illness or death. It’s also a great tool for building your retirement funds without building your tax bill.

Here’s how it works. When you purchase a universal life policy, you pay more than the cost of the insurance. Once the premium and management fees are deducted, the remainder goes into a tax-sheltered investment fund of your choice. “It’s the best of both worlds,” says Di Vito.

When you retire, you can withdraw funds (they’ll be taxed as income) or, better, name your bank as beneficiary and then borrow money against the policy to supplement your retirement.

When you die, the policy repays the loan and interest, and the balance is paid to secondary beneficaries.

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