Financial planning is a lifelong endeavor, but people often seek out investment advice that doesn’t fit their current stage in life. When it comes to saving for retirement, most Canadians invest and manage those savings for six decades or longer. It’s important to consider how your resources and risk tolerance change as you move though different life stages. Saving for your retirement looks very different at age 30 compared to age 60. As financial advisors, we strive to help our clients develop retirement savings plans that are appropriate to the changing circumstances they face at every age. Here are some areas that we consider when giving age-appropriate retirement advice.
In the past, investment experts advocated the “100 Rule,” which called for subtracting your age from 100 to determine how much of your assets should be invested in stocks. For example, this rule called for 25-year-olds to hold 75% of assets in stocks or “riskier” investments and 25% in bonds, CDs, equities or other low-risk investments. Now this has been updated to the “110 or 120 Rule” because Canadians are living longer, making it extremely important to generate enough money to last throughout retirement. While this rule is useful for general guidance, it’s important to look at your particular situation and develop a more nuanced investment mix that is more closely aligned with your retirement savings goals and risk comfort level.
In your 30s, there are a lot of competing priorities that can drain your cash flow, such as buying a home, planning a wedding, buying a car to transport children, and paying for day care. It’s important to save for your short and long term goals, which can be reflected in your investment mix. A TFSA can work well for your short-term goals.
Take full advantage of your employer’s contribution by investing 10% to 15% of your salary in your office retirement plan in your 30s. Investing in a home or rental property is a good idea, provided you will be able to keep the real estate for at least five years. When you compare long-term investment returns on stocks and bonds, stocks vastly outperform cash and bond investments over time. You have decades to potentially make up any temporary losses in the stock market, so invest as aggressively in equities as your risk comfort level allows.
By the time you reach your 40s, you need to be saving as much as possible for your retirement. Now is the time to max out your retirement contributions. In 2018 the maximum yearly RRSP contribution is $26,010. Also, investing in a tax-advantaged TFSA in addition to RRSP will help boost your retirement savings.
A financial advisor can help determine the ideal investment mix to achieve your savings goals while maintaining an acceptable risk level.
When you are in your last decades of saving for retirement, it is time to start re-balancing your portfolio. A financial advisor can help you compile a comprehensive financial profile, assessing all your funding sources to figure out your ideal investment mix to provide income throughout your retirement.
If you have any outstanding debt, this is the time to make sure you have paid it off, that way you are not draining your retirement income paying your debt.