Canadians are living longer than ever. According to the World Bank, newborn Canucks can expect to live to an average age of 82. This is excellent news for us, but makes planning our finances more difficult. It’s a tradeoff we won’t complain a whole lot about. Nonetheless, this article is to help those of you wondering: How do I keep my nest egg golden for my golden years?
You might already be retired, or maybe you’re waiting for that gold watch before calling it a career. Even if you don’t plan on fully retiring, your financial goals and the investment steps to reach them change as you age. Hopefully, you’ve had a financial plan leading up to your retirement that has helped you grow your nest egg. Even if you haven’t, this article is still for you.
What you’ll learn:
- How to invest so you can invest your time
- Budgeting! Budgeting! Budgeting! (We promise it’ll be fun)
- Easy ways to adjust your portfolio for your risk appetite
What’s on your bucket list?
The first question you need to ask yourself isn’t how to invest your savings, but how to invest your time. Unless your idea of fun is watching the stock ticker all-day, we’re guessing you have other thoughts on how you’d like to spend your free time. Maybe you want to travel abroad, improve your golf score, purchase a cottage, babysit your grandchildren, or finally get those rose bushes in contest form.
If so, you need to make a list of your favourite pastimes and future pursuits. This list will set the tone for your investment goals and help you develop that all-important budget.
How much do you need?
Budgeting is the first piece of any financial plan. You need to know how much is coming in and going out to make sure your nest egg is in good form. The major difference between retired life and the 9-5 isn’t just sleeping in. There’s no more paycheck coming in for the hours you’ve spent at the office.
We recommend you determine your average monthly income and expenses. It’s important to be honest and accurate, as it’s always better to overestimate your expenses and underestimate your income than the other way around. Here are a few categories to get you started:
- Government Benefits (Old Age Security, Canadian Pension Plan)
- Company Pension
- Part-time or Temporary Work
- Registered Retirement Savings Plan (RRSPs)
- Non-RRSP Investments
- Mutual Funds
- Real Estate Income (rent, Airbnb, etc.)
- Other Income
- Rent or Mortgage Payment
- Property Taxes
- Insurance (health, home, car)
- Utilities (electricity, heat, water)
- Telephone, Internet, Cable
- Car & Transit
- Loan Payments
- Other Fixed expenses
- New Hobbies
- Income and Capital Gains Taxes
- Loan payments
- Entertainment (eating out, concerts, movies, etc.)
- Household Expenses (cleaning, repairs, furniture, etc.)
- Healthcare (dentist, medication, glasses, etc.)
- Taking your grandchildren for ice cream
- Other variable expenses
Once you’ve estimated your total monthly expenses and income you simply subtract expenses from income to determine your ‘spread.’
Let’s use the lovely couple Fred and Maureen as an example. Married for 40 years and both 65 years old, Fred and Maureen have recently retired. They’ve calculated their monthly expenses as $5,500 a month and their monthly income at $6,000. They have a positive spread of $500.
If your spread is positive, you are at a monthly surplus. This is a great place to be and you can now stop reading … don’t actually leave! Now you must adjust your plan to maintain this surplus, or reduce your investments at a measured rate so that your nest egg doesn’t hatch too soon.
Our second couple is Ben and Jennifer. Also happily married for 40 years, they are 65 years young. After hearing all about Fred and Maureen’s budgeting on a double date, Ben and Lisa smartly decided to create their own budget. They realized they’ve been spending $5,500 a month, but only bringing in $5,000. They have a negative spread of $500.
If your spread is negative, you are running at a deficit. But don’t worry! There are hundreds of reasons for a deficit. Maybe you have a few more mortgage payments left, or a lot of grandkids that need a lot of ice cream. Perhaps you have savings just sitting in a low-interest account when you could be creating passive income with it. What’s most important is making sure you aren’t in a debt spiral. Sometimes reducing a few unnecessary expenses and focusing on paying back loans is all it takes.
Regardless of the spread, your risk appetite has changed once you’ve retired. Armed with your new bucket list and budget you can now perfect your portfolio.
Note: There are several variables to consider when fine-tuning your budget, take note of the following considerations:
- Government Benefits can be reduced if you have additional income sources.
- Large, one-time expenses sometimes come unexpected, and so it’s important to have an emergency fund.
- Once your RRSP is turned into an RIF, you must take out a minimum amount each year.
- Hopefully you haven’t thrown out your tax-return software, because taxes aren’t just for wages. Dividends, interest, RIF withdrawals, capital gains, etc. are still subject to taxes.
Risk Tolerance and your Portfolio
An investing maxim for retirees: once you’ve reached your golden years your appetite for risk (and alarm clocks) has declined.
A well-diversified and low-risk portfolio should be your goal no matter your age, but in your golden years it’s that much more important. Take for instance the most recent financial crisis when the Dow Jones Industrial Average (major stock market index) dropped 54% by March 6, 2009 from its peak of 14,164 in October of 2008. As of today (April 14th, 2016) the Dow Jones is at 17,926. Historically the stock market has always recovered and grown, but Ms. Market marches to the beat of her own drum. You never know if she will dawdle or sprint to recovery.
If you have the means to weather a stock market storm, then historically your portfolio should be fine in the long run. However, you plan on living your retirement to the march of your own drum, not the market’s. That’s why adjusting the risk of your portfolio is so important in your golden years. Read on for tips for adjusting the risk of your nest egg:
Ways to diversify and plan for risk:
- Asset Allocation: The conventional rule for asset allocation is to subtract your age from 100 to determine the percentage of stocks in your portfolio. For example, Fred and Maureen are both 65, so 100-65 = 35% of their portfolio should be in the stock market. The other 65% can be in more conservative investments, such as bonds, GICs, cash and more.
Note: We’re living longer than ever these days, so consider increasing your stock market allocation by a few points. Shares offer historically higher returns than bonds and GICs. According to a Jeremy J. Siegel & Russell E. Palmer study “One dollar invested in stocks in 1802 would have grown to $8.8 million in 2003, in bonds to $16,064, in Treasury Bills to $4,575, and in gold to $19.75.”
- Blue Chips: Stocks don’t have to be incredibly risky. Consider investing in blue chip companies (e.g., Microsoft, Coca-Cola) that tend to weather market dips and continue to create a profit. These type of companies are also more likely to offer dividends, which provide you with a nice passive income to fund your grandchildren’s’ ice cream cravings.
- DRIPs: Einstein purportedly said, “compound interest is the most powerful force in the universe.” This was a man who calculated the rate at which the Universe expands, so that quote carries some weight. Hopefully you took advantage of compounding during your working years, but if not don’t worry. Compound your dividend income by enrolling in a Dividend Reinvestment Plan (DRIP). In a DRIP, dividend income is automatically used to purchase more shares, and at a discount since share purchases are often commission-free. By reinvesting your income, you are putting more money to work which also means your next dividend payout can be larger and once again used to buy more shares. Over time, this can grow your investments exponentially. Most brokerages (the company you buy and sell your stocks through) let you enroll in DRIP plans and will automatically use your dividends to buy new shares.
- Mutual Funds: The ultimate product for diversification, mutual funds pool the capital of investors to purchase securities such as stocks, bonds, money market instruments, from all types of industries and geographies. Owning more securities means your risk is spread out, because when you own shares in a single company there is always the chance that something could go south. Sorry for the cliché but “don’t hold all your eggs in one basket,” especially your nest egg.
- ETFs: the mutual fund’s younger, but more affordable cousin. Unlike mutual funds, ETFs trade on the stock exchange and are usually passively managed, meaning they follow an index. The major difference between these two diversification products is ETFs have a lower management fee, which can save you a lot of money in the long-run for a similar, if not better product.
- Wealth Management: If I lost you after the headline, don’t fret! That’s why we have financial professionals whose passions are to understand your portfolio goals and the pathways to get there. There are many great financial advisors out there willing to help you on your financial journey.
That said, you want to make sure advisors’ interests are aligned with yours. Find out how they are paid and this will tell you a lot. For instance, if an advisor gets paid by mutual fund companies to sell their products, then the advisor might invest your money in the products because they get paid for it and not necessarily because it’s the right investment for you. There has been a rise in popularity for financial advisors that offer fee-based services. This means the advisor charges you a fee for advice instead of getting paid by investment representatives. This removes the conflict of interest issue, allowing you and the advisor to focus on your and only your goals.
Remember, your mother was right when she said you are special. Everyone has unique goals, different investing opportunities, and their own journey. Creating a financial plan can seem overwhelming, but it can also be a lot of fun and empowering to take control of your own financial future.
A strategy for investing is essential to a happy and leisurely retirement. By reading this article, you’ve already taken that first step. We hope you enjoyed reading and we’ll see you on the tennis court!
Do you have any tips to add? How about questions for our experts? What are you most looking forward to in your retirement? We’d love to hear from you.
If you enjoyed this post, please consider sharing it on Facebook or Twitter below.
This communication is intended for informational purposes only and is not, and should not be construed as, investment and/or tax advice to any individual or analysis on market direction.
The views and opinions express herein are those of the author and do not necessarily reflect the view of Accessibility Professionals Inc. Accessibility Professionals Inc. does not guarantee the quality, accuracy, completeness or timeliness of the information provided. Accessibility Professionals Inc. assumes no obligation to update the information. Accessibility Professionals disclaims all warranties, representations and conditions regarding use of the information provided.