The best investments for retirement will include RRSPs, dollar-cost averaging, and diversified holdings

We recommend that you take the safer route to retirement planning instead of taking on extra risk. Save more now, work longer, or plan to spend less. Retirement leaves you with lots of free time, and filling it costs money. But postponing retirement, or working part-time as long as you’re able, can pay off in higher current income, more contentment and greater long-term security.

Below are some strategies for the best investments for retirement, which we think will help you minimize risk and maximize returns.

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The best investments for retirement: Registered Retirement Savings Plans (RRSPs)

RRSPs are a great way for investors to cut their tax bills and make more money from their retirement investing.

They were introduced by the federal government in 1957 to encourage Canadians to save for retirement. Before RRSPs, only individuals who belonged to employer-sponsored registered pension plans could deduct pension contributions from their taxable income.

RRSPs are a form of tax-deferred savings plan. They are a little like other investment accounts, except for their tax treatment. RRSP contributions are tax deductible, and the investments grow tax-free.

You only pay taxes on your RRSP investment, and the income it earns, when you make withdrawals from your RRSP. The money you withdraw is taxed as ordinary income, and a withholding tax is applied at the time you make the withdrawal.

Successful investors put their safest investments in RRSPs. These investments have the greatest potential to increase in value over time and therefore benefit from the RRSP’s continuing protection from taxes.

If these investors indulge in speculative stocks or penny stocks, they do so outside their RRSPs.

The best investments for retirement: Dollar-cost averaging helps you buy more shares at low prices

The best retirement plan you can have is to start saving as early in your working career as possible. You then invest a steady or rising amount of that money in the stock market every year. When you follow this plan, you automatically profit from dollar-cost averaging. You will automatically buy more shares when prices are low, and fewer shares when prices are high, and they’ll benefit from the long-term rising trend of the market.

When you’re retired, you reverse the process. You live off your dividends, and sell stocks only when you need more money. When you do that, you sell your lower-quality holdings first. That way, your sales have the added advantage of upgrading the quality of your portfolio.

Long-term studies show that the stock market as a whole has generally produced total pre-tax annual returns of 8% to 10%, or around 6% after inflation. Over periods of a few years or less, the return is far more variable and always uncertain.

The surest investing strategy for getting around this uncertainty is to start practicing dollar-cost averaging as early as possible, and invest regularly over the course of your working years. Then you can sell gradually in retirement.

The best investments for retirement: Our portfolio diversification approach gives you strong potential for long-term gains

If you diversify as we advise, you improve your chances of making money over long periods, no matter what happens in the market.

For example, manufacturing stocks may suffer if raw-material prices rise, but in that case your Resources stocks will gain. Rising wages can put pressure on manufacturers, but your Consumer stocks should do better as workers spend more.

If borrowers can’t pay back their loans, your Finance stocks will suffer. But high default rates usually lead to lower interest rates, which push up the value of your Utilities stocks.

As part of their portfolio diversification strategy, most successful investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

For example, conservative or income-seeking investors may want to emphasize utilities and Canadian banks in their portfolio diversification, because of these stocks’ high and generally secure dividends.

More aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks.

However, you’ll want to spread your Resource holdings out among oil and gas, metals and other Resources stocks for added diversification and exposure to a number of areas.

How do you manage speculative stocks in regards to your retirement portfolio?