The fundamentals for retirement saving remain the same: Set goals, diversify your holdings and adjust the mix as your life situation changes. But first and foremost - get started now!
As costs rise and markets fluctuate, retirement can seem further off than ever these days. The question on everyone’s mind is: “Can I still retire someday?”
Yes, you can, says Rob McGavin, Director of Retail Deposits and Services at Scotiabank. But you have to keep your eyes on the prize - and that’s long-term, not today or tomorrow. So the sooner you get out of the gate, the better.
“The way to achieve the most comfortable retirement possible is: Have a plan,” says Mr. McGavin. “Whether you are raising a family or you’re midcareer, get started – or re-started – right away. Time is a great enabler, but investors at any stage of life who choose to proactively pay themselves first, and invest regularly, can benefit dramatically.”
Begin by setting some goals. Visualize what you expect to do in retirement, so that you know the expenses you will need to cover. Will you continue to earn income part-time or through a hobby or skills that you enjoy applying? Will you travel frequently? Will you own the same home or downsize? Will you continue to own a car?
Next, understand where money comes from in retirement. This includes CPP and Old Age Security, your employment pension, RRSPs, tax-free savings accounts, home downsizing and any other investments, property or assets you might own.
The plan doesn’t need to be complicated, but it does need to be achievable. That’s why experts like Mr. McGavin suggest working with an advisor. “An advisor can tell you whether your goals are realistic, and ask questions that you may not have thought about. They also know what you have to do now to achieve those goals with the time you have to invest and save.”
Furthermore, an advisor can help you make smart investment choices that are not driven by emotions about prevailing market conditions. But that’s not to say that your plan will never change.
“Normally, you should not let short-term hiccups disrupt your long-term plan,” says Mr. McGavin. “But as time passes, you should regularly revisit your plan with your advisor. Your objectives may change or you may want to reassess any number of variables, but the mix of assets that is best suited to your time horizon will also change.”
Don’t Avoid Risk - Manage It
The reason the mix of investment assets in your portfolio may change is that risk tolerance changes as investors approach retirement, and asset allocation is one of the primary tools for managing risk.
“Asset allocation centres on the concept of managing risk while maximizing long-term returns,” says Neil Macdonald, Managing Director of Product Development with Scotia Asset Management L.P. “Knowing your objectives and time horizon, your advisor creates a portfolio of investments within a level of risk that’s comfortable for you, while making sure your plan’s asset allocation divides your holdings between stocks, bonds and risk-free investments,”
The relative mix of these investment instruments is critical to the level of risk in the portfolio. “Taking too much risk for your investment timeframe can be devastating if the market declines, as it did in the tech bubble of 2000 or the 2009 market correction,” says Mr. Macdonald. “It’s equally destructive to take too little risk if, for example, inflation erodes a too-high percentage of fixed-income investments in your portfolio.”
As an investor’s timeline shortens, it becomes harder to make up for these kinds of losses. Finding the right asset mix becomes critical, especially when markets are unpredictable and interest rates uncertain. “As investors approach retirement,” points out Mr. Macdonald, “the key is not to avoid risk, but to manage it.”
To manage changing levels of risk, the mix of assets must change. Because stocks have historically posted higher returns in the long term than bonds, he says, Scotiabank recommends that at least 75% of a portfolio’s value should be in stocks with more than 15 years to retirement. Between 15 years and retirement, asset allocation gradually shifts in favour of bonds, emphasizing longer duration and higher nominal returns.
“As you approach retirement, gradually sell more volatile equities of emerging economies and small-cap companies,” he says. “And upon reaching retirement, bond allocations should peak, shifting to shorter duration and higher inflation protection. You still have a 20-year to 30 year time horizon after retirement, so some risk exposure is appropriate and needed - but they should be more stable in nature such as mature blue chip stocks.”
It’s all part of risk-managed investing that meets long-term needs, so make sure you go over your plan with your advisor from time to time.
Regards,
Nino
Pasquariello
Tricks Of The Trade:
It’s The Economy, Stupid
If I’m correct – I think it was Bill Clinton who said this now famous phrase “It’s The Economy, Stupid” in his 1992 election campaign. That certainly seems to be one of the issues I hear when I’m chatting with people about planning a move in real estate. The economy – jobs and how sound is the real estate market.
I try to keep up with BBC World News, CBC, Reuters and various Bank economic reports and I tend to jot down notes when I hear comments about the current economy and what may be in store for us in 2011. In no particular order these are some of the points that I’ve heard during the last few weeks:
- Interest rates should remain at historic lows – making housing in Canada affordable.
- People should still take the time to prepare a budget and stay within their comfort zones financially.
- When chatting with your bank – be sure to look at amortization rates and ask your Lender to calculate your costs if interest rates rose by 2% or 4% during the next couple of years. Could you still afford to carry your debt without worry?
- How secure is your job? Are you planning a career change – if so – what is the economic forecast in your new field?
- What are your housing costs as a percentage of your income?
- The Toronto market is expecting a moderate 3% price increase during 2011. With stable interest rates predicted – we should see a balanced market.
- Sales volume in Toronto in October was down from a year ago but prices were still higher than at the same time last year.
- There has been talk of a “bubble” in real estate, over-valued Canadian markets (Vancouver - Calgary - Toronto) and predictions of a “correction”. As always there are the naysayers and the doomers & gloomers.
- The Federal Government did tighten mortgage lending requirements in February this year. So the best course of action if you are planning to trade in real estate is to have a good plan and have your Bank/Lender on side with accurate budget figures.
- Full recovery of the Canadian economy is expected to take a year longer than previously expected.
- CREA President Georges Pahud expects that 400,000 homes will change hands in the Canadian real estate market in 2011.
- Canadians are still money conscious and where possible are focused on paying down their debt and their mortgages.
- Buyers are cautious and careful about making important financial decisions but it is still expected that Buyer and Sellers will enter the market in healthy numbers in 2011.
Well there you are – a few interesting things to ponder about the economy and real estate as we enter the holiday season!
Regards,
Rosemary...
Okay, Okay - Here's The Joke …
Another
Really Bad Joke
