Friday, September 24, 2010

As your life changes, so should your investment strategy

It is said that a constant in life is change. That is why the 'set it and forget it' investment strategy is outdated - especially when it comes to making sure that your investments will deliver the returns you need for the quality of retirement you want.

Let's look at how change can affect your retirement date, your retirement lifestyle and your requirement for retirement income:
  • Life expectancy is increasing. People are living longer and healthier lives and that means your retirement plan should ensure you don't outlive your income
  • It is no longer mandatory to retire at age 65 in most occupations. That means you may wish to work after age 65 to fund your longer retirement. Or, you may decide to continue working part time after retirement either to supplement your income or just because you want to
  • Companies are learning to value older, more experienced employees. Yours may offer incentives that will keep you on the workforce after the old-school 'traditional' retirement age of 65
  • Defined benefit pension plans are becoming less common. That means a growing number of employees can no longer assume they will have a 'defined' retirement income. Instead, these employees must bear more responsibility for their retirement plans and, perhaps, more uncertainty about a feasible retirement date
So, the key is to maintain a flexible investment strategy that allows you to make revisions on your own schedule as your personal 'life changes' dictate. The lifecycle approach to investing takes into account your financial needs and ability to save at the three main stages in your life:

Ages 25-40 - These are the saving years when you typically have higher expenses and less to invest. You should maximize contributions to your Registered Retirement Savings Plan (RRSP). However, because you have a long time horizon to retirement, you can also choose a more aggressive investment strategy that targets volatile investments that might go down in the short term but may produce higher returns in the long term.

Ages 40-60 - These are the wealth-building years. Your debt is reduced or eliminated so you have more capital to invest. Maximizing contributions to your RRSP is still a very important part of your retirement plan and, as your retirement years approach, you may want to redirect your portfolio into lower-risk, fixed-income investments.

Age 60 and over - These are the retirement years. You will likely need to begin tapping into your accumulated investments in order to sustain your retirement lifestyle. Focus on investments that preserve your capital but also consider growth investments that can add to your retirement income and protect against the effects of inflation over the extended years of your retirement.

There are other important aspects to your retirement planed based on an effective income investment strategy - such as diversification and asset allocation - and a professional advisor can help you make the best choices to suit your lifestyle, regardless of changes.

Tuesday, September 14, 2010

Financial planning beyond the numbers

What is a financial plan? Why do you need one? Good questions – and the answers should be as personal as your fingerprints. That’s because, even though financial planning might be perceived as a catch-all term for a set of steps and actions aimed at achieving financial security, your plan must be precisely designed for your unique situation and life goals. But to get you started in the right direction, here is a general answer to the first question: What is a financial plan?
  • A financial plan can include: investment planning, cash flow planning, insurance planning, estate planning, retirement planning, and tax planning.
  • To be successful, your plan should be developed according to the financial planning process, which includes:
    • Goal setting – to establish and prioritize your goals and concerns.
    • Data gathering – assembling all your financial info to understand your current financial situation.
    • Financial analysis – using your current and projected financial situation to find the best ways to reduce your taxes, assure you will have enough income to cover your expenses during retirement, meet your ongoing income needs, protect your family and income if you become disabled or die unexpectedly … and uncover any other personal financial questions that need to be answered.
    • Plan formulation and recommendations – discuss, review and decide on alternatives and solutions for achieving your financial and life goals.
    • Plan implementation – the steps you need to take to make your plan work.
    • Monitoring and plan review – your should review your plan at least annually or when major life events occur by looking at your important life goals, investment portfolio and performance, cash and savings management history, lifestyle protection
      (insurance), retirement planning, estate planning, and tax minimization strategies.
So, in a nutshell, that’s what a financial plan is. Now, to answer your second question: Why do you need one?

That’s easy: If you have an income, a family (or the hopes of one), dreams of a comfortable retirement, or any of the dozens of other personal financial or life goals, you need a financial plan!

Describing a financial plan is one thing, putting together a successful plan tailored specifically for you is another – and it can be a complex process. Your professional advisor can help you develop the plan that works for you and keep it on track to meet your ever-changing needs.

Tuesday, September 7, 2010

When is the right time to invest?

You’ve managed to put aside a little extra cash or you’re expecting a nice tax refund and wondering what to do with the money. You’re thinking about investing it – maybe in your Registered Retirement Savings Plan or by purchasing a few shares of this or that to add to your non-registered portfolio. But you’re hesitating – markets are volatile right now. Is it better to wait? When is the best time to invest?

The answer is: Make your investment as soon as possible. Here’s why:
  • Most seasoned investment professionals will tell you that it is almost impossible to time the market. They will also tell you that time in the market is much more valuable than attempting to time the market
  • Markets move up and down but the historic trend is up – so staying true to a long-term investment strategy delivers far higher returns than jumping in and out of the market
  • The best long-term strategy for most investors is to make your investments immediately – even if the market is at its lowest point of the year – and, even better, try to invest regularly instead of holding off and making a lump sum investment once a year
  • When you invest regularly, you accomplish three important investment goals:
    • You take full advantage of ‘dollar cost averaging’ – meaning you make your investment purchases (either in non-registered stocks or by acquiring more units in your RRSP) whether the price is lower or higher and, over time, this results in a reduction in the average cost of your investments while improving the potential for longer-term returns
    • You maximize the benefits of your RRSP. Your money grows tax-deferred inside your RRSP so regular contributions and the ‘magic of compounding’ can add thousands to your retirement nest-egg. For example, if you contribute $200 dollars a month to your RRSP (at an average compounding annual return of 8%)after 25 years you will have $190,205. But if you make a single lump sum contribution each year, you will have only $175,454 in 25 years
    • It’s much easier to come up with $100-200 each month (say through a Pre-Authorized Contribution – PAC – plan) than finding a lump sum to invest once a year
A regular and balanced investment strategy will ensure you achieve your financial goals. Your professional advisor can help you set up an investment plan that fits your budget and dreams.