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.
Ideal Asset Allocation by Age
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 20s: Balance Saving and Investing
Your earning ability is at its lowest in your 20s, but the power of compound interest makes this decade the best time to invest. Many professionals recommend that people in their 20s invest a majority of their retirement savings in stocks rather than bonds or savings accounts. A 2016 investment analysis by NerdWallet found that a 25-year old with a $40,456 salary who invested 15% a year exclusively in the stock market would likely end up with as much as $3.3 million more than if they kept their money in savings accounts. Regardless of how you invest your retirement savings, you should strive to balance your approach with paying off outstanding debt (student loans, credit cards) and saving for an emergency fund.
In Your 30s: Invest For Short Term and Long Term Goals
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.
In your 40s: Maximize Your Retirement Contributions
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.
In Your 50s and 60s: Start Preparing for Retirement
When you are in your last decades of saving for retirement, it is time to start rebalancing 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.
We suggest using the above recommendations as starting points to saving for retirement throughout the different life stages. However, regardless of age, everyone can benefit from a personalized retirement plan. As financial professionals, we are available to help you figure out the ideal asset allocation for your retirement savings plan at your stage of life. Please contact us for a complimentary consultation.
Sources:
Friedberg, B. (2018, May 21) Here’s How You Should Invest at Every Age. [Blog post]. Retrieved from https://www.thebalance.com/how-to-invest-at-every-age-4148023
Leary, E. (2007, November). Best Investing Moves at Every Age. [Blog post]. Retrieved from https://www.kiplinger.com/article/investing/T052-C000-S002-best-investing-moves-at-every-age.html
Cazzin, J (2018, February). What’s Your RRSP Contribution Limit. [Blog post] Retrieved from https://www.moneysense.ca/save/investing/rrsp/rrsp-contribution-limit/
Kumok, Z. (2017, Jan. 7) Are Your Investments Right for Your Age?. [Blog post]. Retrieved from https://www.investopedia.com/articles/investing/090915/are-your-investments-right-your-age.asp
Frankel, M. (2017, May 28). Here’s How to Determine Your Ideal Asset Allocation Strategy. [Blog post]. Retrieved from https://www.fool.com/retirement/2017/05/28/heres-how-to-determine-your-ideal-asset-allocation.aspx
