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Living With Today’s Investing Realities

Investing Realities

Today’s investing realities are less than desirable, but they are what they are and we need to make the most of what we can.  Who would have thought last June that we would see the price of a barrel of oil dropping from $115 US to less than $50 like we saw last month? We also wouldn’t have predicted that the Bank of Canada rate would be cut by another 25 basis points, with the possibility of another cut to come. With this in mind, it’s easy to see that we need to keep a flexible, open mind to our approach and pay attention to our investment strategy.

A recent poll found that many Canadians are leaving their retirement plans to chance. At the same time, almost two-thirds of respondents said that if they lived to age 100, running out of money was a major concern. Only a little over a third said they had put something towards their retirement savings in 2014, and another third said they haven’t even started saving for retirement. It was found that women are even more unprepared for retirement than men, as three quarters of the women polled did not have a retirement savings goal compared to 60% of men. It also found that women in general have less retirement savings than men, and almost 60% don’t have any type of a financial plan.  Read more on this poll at The Globe and Mail.

It appears that many people don’t consider the major risks we all face going into retirement:

  1. Market fluctuation: A few years of negative returns prior to or just into retirement can have a devastating effect on savings, with little opportunity to recover.
  2. Inflation: Reduces the future purchasing power of one’s savings.
  3. Longevity: People are living longer and risk of running out of money.

Investors today should plan for the possibility of living to age 95 for men and 97 for women when calculating how much they need to retire comfortably.  Check out Jonathan Chevreau’s article on how “Longevity Changes Eveything”. Unfortunately, many Canadians today are caught up in their busy day-to-day lives and end up not focusing enough on their future retirement needs.

With five-year GICs now paying around 2% interest and the annual inflation rate at about 3.5%, retirees will have to look elsewhere for income. This could be balanced type funds, solid dividend paying stocks, or annuities. Even though people’s risk tolerance usually decreases in the draw-down years, in the current financial environment, Canadians need to be careful to not be excessively conservative. If your registered investments are earning only 2%, you could run out of money very quickly under today’s RRIF rules that require a 72-year-old investor to withdraw at least 7.4% of their investment annually. Consider the following: Say you have $300,000 of retirement savings, and your annual income needs are $15,000 for 30 years. Those yearly withdrawals will drain your savings in 20 years, 10 years shy of the needs target. In this case it would be good to consider an annuity to provide guaranteed monthly income for life.

If you take your entire RRIF payment at the beginning of each year, then you might consider a five-year laddered bond strategy. This way a bond will come due every year when you want to withdraw the required funds. Longer life spans and today’s less-than-stellar yields from fixed-income products make annuities one of the best income options out there for some investors.

Rather than waiting until the last minute to contribute to your RRSP, why not take an hour or two and sit down with a trusted local financial professional. They can help you get started on developing your future financial plan, as opposed to letting that future happen by chance!

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