When we think about retirement investment planning, no matter your time horizon, the goal of retiring on time with a lifetime source of secure income has become less of a certainty for many people.
Faced with declining retirement plan values, economic uncertainty, and continued volatility in the financial markets, the tendency for many people is to become cautious in their retirement investment planning.
With inflation always looming in the near distance, and life expectancies constantly expanding, it is not a good time be sitting in low yielding investments that can actually decrease your purchasing power in the future.
It’s important to stay on the offensive with a strategy that can keep you on pace to achieving your retirement goals.
Here are three tips for retirement investment planning you can use today:
Spend Like a Retiree
I remember a retiree telling me that as they got closer to retirement they thought of it with excitement and they planned to live each day in retirement as if "everyday was Saturday"
Much easier to do later in life after all of your big purchases have been made and life’s pleasures have been enjoyed, but the pressure is on both young and old to increase their savings rate.
The growing trend among financially responsible people is to simplify and downsize with an eye towards building a better life when they can really enjoy it during retirement.
Scaling down lifestyle needs today can mean the difference between a comfortable retirement and just getting by at a time when income sources become finite and exhaustible.
A slightly smaller home, an older model car, tap water instead of bottled water, bag lunches, bargain vacations, and shopping on Craigslist can free up hundreds of dollars a month that can quickly expand your retirement account.
Maximize all Retirement Plans
With the extra cash flow coming from your lifestyle adjustments, the faster you can put it to work in tax advantaged retirement accounts such as an RRSP or a TFSA, the better.
The tax savings that are generated from your retirement plan contributions will create even more cash flow that can be invested until you have reached your maximum contribution level.
The tax deferral of investment earnings accelerates its growth so the more money you have working inside your retirement account the better.
This is also the reason why you shouldn’t wait until the end of the year to make your retirement plan contributions.
Start making them early in the year to take advantage of the tax deferral for a longer period of time.
Spread Your Wealth Around
The key to successful long term investing is proper diversification. No one can predict the future direction of the stock market or interest rates.
We do know, generally speaking, that rates and stock prices fluctuate and that different types of investments don’t necessarily move in the same direction.
If your money is allocated to just one type of investment, it is completely exposed to the risk inherent in that investment.
Even a fixed yield savings vehicle like GICs and Term Deposits poses a substantial risk over time for its inability to keep pace with inflation.
By diversifying your retirement investment planning, you will mitigate the risks associated with various types of investments.
A basket of different types of equity investments (Stocks), that are growth in nature. Or debt instruments (Bonds).
The longer your time horizon, the more heavily weighted you can be in equities and the closer you get to retirement you slowly allocate more of your money towards bonds and conservative growth investments.
Case Study: Financial SnapShot
Retirement Investment Planning
Greg and Liz (not their real names) had been looking forward to their retirement since I met them back in 1998.
At the time Greg was getting ready to retire from a telecommunication company which had been in the news a lot in those days its shares continued to go up. With no end in sight.
Those were some exciting days for the employees of that company I remember doing a workshop on retirement and the importance of looking to the future.
With the company shares making the employees "rich on paper", their long-term vision was only the size of their next big car purchase.
Greg thought like the rest of his co-workers, he knew while he had all these shares and they were worth a lot of money he saw no reason to cash in any shares.
Especially when everyone around him was getting rich.
But he had once admitted to me that the rise of the stock was "just dumb luck"
We decided with retirement just a year or two away it was important to focus on what Greg and Liz's retirement would look like as their vision.
Retirement investment planning became a priority.
At first they had no immediate plans but they did want to do more travelling.
At first Greg wanted to do some consulting but he had no idea how to get started.
He wanted to do it more for filling up his days with something productive to do.
It is not uncommon to see individuals close to retirement having no idea of what the next chapter of their lives will look like.
For some people the thought of not having to go work each day is a traumatic experience.
In any case with his home paid off, RRSPs, a company pension and company shares that were going through the roof, Greg felt invincible.
As the shares continued to hit record highs I felt it necessary to talk to Greg about diversification once again.
I finally got him to agree that it did not make sense to hold the bulk of his non-registered savings in one stock.
No matter what the news media was saying about it.
He agreed to sell half of the holdings in the company shares and invested elsewhere so that there would be another source of income in retirement.
As the stock began its sharp decline in the early 2000s, Greg had already left the company.
His retirement income was made up of his company pension, a RRIF, income from his non-registered investments and govt pensions.
Greg never did start consulting, today he fills his days by taking art classes, he and Liz travel in the winter to get away from the cold.
Greg often talks about the other half of his company shares he had owned that have since disappeared.
He now fully understands and appreciates the importance of diversification in retirement investment planning to be able to stay away from unnecessary surprises.