Saving and Investing
Are we being handed a line about saving for retirement?
"The traditional advice people get is that in order to retire comfortably, they need to a) start saving early; b) save $1,000,000; and c) save enough to see them through to age 100," says C.A. and best-selling author, David Trahair. "The reality is the majority of people aren't able to do that."
So does that mean most of us won't be able to afford a move to a retirement community? Hardly! Our financial experts are here to explain how much to save, how to make your money last and how to withstand the unexpected hits your savings may take from market crashes, inflation and other events. With the right information and a few key strategies, it`s easier than you think to finance your move.
The Top 5 Financial Questions About Retirement
- How much money do I need to save in order to maintain my standard of living?
Obviously you`ll need to cover expenses but as financial consultant Tim Davies of Investor's Group points out, "Expenses typically go down 25% to 50% in retirement." Hope to travel? Don`t overestimate how much you`ll spend. "That tends to happen at the beginning of retirement and less later on," says Davies. It will, however, cost you more to remain in your own home. "You might garden and shovel snow now but chances are you'll pay someone to do it for you down the road," warns certified financial planner William Jack of Longhurst and Jack Independent Financial Advisors.
- How do I make sure my money doesn't run out?
At age 65, you can expect to live another 20 years and your savings have to last with you. There are a few tactics you can use to make sure your money lasts. One strategy, according to certified financial planner and author Alexandra Macqueen of The QWeMA Group, is investing a portion of your money in an annuity. She also reminds people not to forget about the Canada Pension Plan. "It's insurance." You can also consider investing in blue-chip, dividend paying stocks as a way of creating an additional stream of income. Finally, couples should take advantage of income splitting to reduce taxes, something that becomes particularly important at this stage in the game.
- When should I sell my house?
Selling your home when you`re ready to move to retirement community is a no-brainer but don`t forget selling can take time. Nor are there guarantees about market conditions at that point. Nevertheless, Trahair points out, "For someone without a mortgage, selling their house will give them a huge chunk of cash. And, since it`s their principal residence, there aren`t any capital gains."
- What if the market crashes again?
"We advocate a strategy that divides assets into `silos`," says Macqueen. That means divvying up savings between a variety of products including annuities, Guaranteed Minimum Withdrawal Benefit products, stocks, bonds and GIC`s. Getting the recipe right can be tricky; if in doubt, speak with a financial advisor. A well-constructed investment portfolio can generate a steady stream of income.
- How can I make sure inflation doesn't eat away my savings?
This is a very real concern and one reason some of our experts weren't too keen on products like GIC's. "Short term GIC's never pay the same as inflation so you're constantly losing money," says Davies. He does like CPP and Old Age Security which are both indexed to the cost of living and currently have a combined maximum annual payout in the neighbourhood of $17,000.
The Top 5 Strategies For Making Your Money Last
- Live debt free
"The biggest thing people can do is try to retire debt free. That`s much more important than building up this elusive $1,000,000 figure people talk about," says Trahair. That means living within your means both before and after retirement. If the possibility of trimming back gets you down, remember that most people typically don`t need as much money in retirement as they did when they were working.
- Keep your nest egg in more than one basket.
Anyone who witnessed the stock market tumble in 2008 doesn`t need to be reminded about the importance of diversification. Instead of putting everything in a single asset class, mix things up. A portion of your money invested in an annuity provides a safe and steady stream of income. A Guaranteed Minimum Withdrawal Benefit guarantees principal while offering the potential for more. Blue-chip dividend paying stocks may mean slightly higher risk but will kick-off income and provide a growth-engine for your portfolio. Spread things out to minimize risk and maximize potential.
- Manage your longevity risk.
"We`re so focused on stock market risk but longevity risk is much more significant," says Macqueen. "An annuity is an efficient way of allocating a portion of your money in retirement so you`re not worried about running out." An annuity is a contract between you and a life insurance company. You give them a lump-sum of money and they promise to return your money, with interest, as an income stream over a period of time. That's what makes annuities an attractive way to generate income to cover, say, your expenses for the rest of your life. Interest rates and your age at time of purchase impact the cost of an annuity so you can sometimes get a better deal by playing with these two things. As interest rates go up, for example, the cost of an annuity goes down.
- Minimize taxes.
"Minimizing taxes is important at this stage," says Davies. While Trahair cautions there aren`t endless loopholes just waiting to be exploited, both he and Davies advocate doing what you can. Income splitting, for example, means couples can reduce their overall tax bill.
- Be mindful of inflation.
Prior to retirement, it`s all about saving. After retirement, it`s about maintaining the purchasing power of your money. Maintaining purchasing power is one reason Jack is a big fan of OAS and CPP. "They`re indexed to the cost of living. For some of us, that could mean as much as $300,000 in net present value terms. People really are better off than they think."
Tim Davies, MBA Investor's Group Financial Services Inc
William Jack, CFP Longhurst and Jack Independent Financial Advisors
Alexandra Macqueen, CFP The QWeMA Group
David Trahair, CA Trahair.com