You should by now have spent some time as a couple prioritizing your goals and using the appropriate savings vehicle for your short and medium term goals. How far you need to go (your goal), and how much time you have to get there will determine the most suitable vehicle within your level of tolerance for risk. For your retirement goals you need to consider long-term investing.
Make sure your financial house is in order first
1. You have created a budget. How will you know how much you can invest if you don’t know where the money is coming from and how much you can consistently save?
2. You have eliminated your “bad” debt. If you are still paying off credit card debt that’s carrying high double-digit interest rates, it makes no sense to begin investing until you have at least brought it down to a manageable level.
3. Do you have an emergency fund in place? If your furnace breaks down and needs replacing, you don’t want to have to raid your investment accounts to buy a new one. Make it a priority to put aside some money in a high-interest savings account that you can tap into.
Where do you start?
Start with learning all about equities and fixed income products – stocks, mutual funds and ETFs; investment strategies, diversification, risk and fees. Are you comfortable picking your own investments, or do you prefer to let a professional manage your portfolio? Even if you rely on an investment advisor, one of the most important rules about investing is to understand what you own and why you own it.
The more knowledgeable you are about your investments, the less likely you are to make irrational decisions by letting your feelings get in the way of your common sense.
What is your risk tolerance?
Investing success also means identifying the level of risk you’re willing to take. There are lots of risk tolerance questionnaires online, such as this one from Get Smarter About Money (this site is also a great source for financial education) – or pick one up from your bank. Sit down with your partner to identify your individual attitudes towards risk.
You may not have similar risk profiles and you might think you can just invest according to your own tolerances. However, even though your RRSP, TFSA and pension accounts are only registered in the owner’s name (not joint ownership), the ultimate goal is a shared one, i.e. providing you with future retirement income.
If you are too divergent in your risk tolerances – one is super conservative only investing in HISAs and GICs, and the other the total opposite gambling with leveraged and high risk stocks – you may benefit from having a discussion with an investment advisor who can advise on a more balanced strategy.
How much should you invest to start?
Your objective should be at least 15% of your gross income, using the pay yourself first principle. You can certainly start with a lower amount that you know you can easily put aside and then adjust as you go along. By reviewing your budget and getting your priorities straight you can make headway on increasing your savings rate.
Make time your friend
The earlier you start investing, the more time works in your favour. Procrastinating turns time against you. It’s easy to put your retirement goals on the back burner for more pressing shorter term needs. You don’t want to end up working in your seventies because you spend too much today.
On the other hand, attempting to time the market is a foolish proposition. Investing when the “time is right” is a great strategy if you can see the future. Even professionals rarely get it right.
What are the right investment products for you? What strategy should you use? Everyone is different and what is comfortable for one investor makes another lose sleep at night.
When you open a RRSP or TFSA you often have a range of investment options to choose from – stocks, bonds, mutual funds, and exchange-traded funds – and it can become confusing. This is where your investment knowledge comes into play.
You have the choice of making and monitoring your basic investments yourself with an online brokerage account. If you don’t like research and analysis, you’ll want to keep things simple with a low-cost “couch potato” strategy. You may want to hire a financial advisor to help you, especially as your portfolio grows.
There is no “best” investment strategy except the one that works for you.
Further reading in the Financial Planning for Couples series:
Last week we talked about boosting retirement savings during your final working years. In an ideal world you’ll have the double-effect of being in your peak earning years while your largest financial obligations are in the rear-view mirror.
In the real world, however, many Canadians are faced with an uncertain retirement because they lack adequate savings, don’t have a company pension plan, they’re still carrying a mortgage, line of credit, or even (gasp!) credit card debt, or they’re still providing financial support to their adult children.
Expecting lifestyle to change
A new Tangerine survey revealed that when it comes to financial expectations for retirement years, the majority (59 percent) of Canadians aged 55-64 believe their lifestyle will need to change despite having retirement savings, with 20 percent expecting to face major lifestyle changes and 12 percent saying they will have to keep working longer in retirement years.
More than three-quarters of those expecting lifestyle changes say they did not make sufficient retirement contributions during their earlier years – 47 percent did not contribute enough, 44 percent did not start saving for retirement early enough, and 22 percent don’t have a company pension or an RRSP/RSP savings account. 40 percent are still paying other debts, and 15 percent support their adult children.
Of those Canadians age 55-64 that still provide financial support to their adult children, this help is most often in the form of money for monthly or recurring bills, help with grandchildren, help with education other than RESP savings, and sizeable monetary gifts. More than a quarter (26 percent) of Canadians of pre-retirement age still have their adult children living with them.
Preparing for retirement
Much like preparing for a new addition to the family, or for one spouse to stay home with the children full-time, preparing for retirement is about understanding new spending patterns.
If your final working years aren’t spent in savings overdrive mode, perhaps there’s time to test out your retirement budget in the year or two before you retire. You might as well try living on 40 – 60 percent of your income while you’re still working to see if it’s realistic.
If it’s not, there’s still time to adjust course by altering your income expectations, working longer (and saving more), or revisiting your investment strategy. Speaking of which…
Investing in retirement
One of the biggest worries for retirees is outliving their money. That’s why it’s crucial to have a proper investment strategy in retirement. Investors don’t simply sell their stocks and move to bonds, GIC’s and cash once they retire. Canadians are living longer and our portfolios need to be built to last.
One strategy to consider is the bucket approach. The idea is that while retirees need cash flow, they also need a diversified portfolio of stocks and fixed income. Your first bucket is for immediate needs and should contain one or two years’ worth of living expenses in easy-to-access cash. Bucket two is for medium-term needs and is filled with bonds or a balanced mutual fund. Bucket three is meant for long-term needs and so it’s typically filled with stocks, ETFs, or equity mutual funds.
Also read: A better way to generate retirement income
Understanding CPP and OAS benefits
Whether you think you’ll rely on government benefits or not, it’s important to understand how CPP and OAS benefits work and how they might impact your retirement income plan.
The maximum monthly payment amount for CPP in 2016 is $1,092.50, but the average monthly amount for new beneficiaries is actually $642.45. You can take your CPP benefits as early as 60, but the amount is reduced by 0.6% for every month you receive it before 65.
Alternatively you can delay taking CPP until as late as age 70. In this case your pension amount will increase by 0.7% for each month you delay receiving it up to age 70.
OAS pays a monthly maximum of $578.53. Unlike CPP, which is tied to your employment history, you can receive OAS even if you have never worked or are still working.
While you can’t take your OAS pension early, you can delay receiving it for up to 60 months in exchange for a higher monthly amount – up to a maximum of 36% at age 70.
As you can see, there are advantages to delaying your government benefits. Namely, if you expect to live a long and healthy life, and have sufficient income to meet your needs through to age 70, it makes sense to delay taking CPP and OAS.
New retirement reality check
It used to be rare to retire with a mortgage, and unheard of to have your adult children still living at home. But today, with four in 10 Canadians aged 55-64 still carrying debt, and 15 percent still supporting their adult children, there’s a new retirement reality setting in.
It brings a level of uncertainty to retirement as lifestyles get adjusted on the fly and new spending patterns emerge. It means working diligently, on your own or with a financial planner, to ensure retirement expenses don’t exceed your income target.
The good news is that the majority of boomers (75 percent) feel prepared to manage their finances during retirement, either by working with a financial planner (44 percent) or having a good knowledge of personal finance (31 percent).
More than ever, preparing for retirement today involves careful financial planning and an open mind. You need to understand how to keep investing effectively while in retirement, determine when to take CPP and OAS, and understand how those government benefits fit in to your retirement income plan.
As your mortgage is nearing its end, you need to decide how comfortable you are carrying debt into retirement. Then, to add another wrinkle to your retirement plans, there are your adult children (or grandchildren) to consider, and how much (if any) financial support you wish to provide for them.