Retirement should be a sure thing
Retirement portfolios are designed to provide a lifetime of income. But over a lifetime, they face the treacherous storms of a continually shifting investment climate!
In recent months, dark clouds have been gathering on the horizon – inflation, a slowdown in global economic growth, sub-prime woes, and down side market volatility. And after a 5 year bull run the Canadian stock market stumbled severely this past summer causing many investors to rethink their tolerance for volatility. However, there are a number of financial strategies and products that can protect the value of retirement investments, and smoothing volatility in our client’s holdings. And while we can’t control the markets, we CAN control how you interface with them…… For that reason, EVERY PRODUCT WE SELL HAS A GUARANTEE, and that applies to your investments.
One of the oldest sayings around is that there are only two constants in life: death and taxes. Given the results from the latest StatsCan Census data, we would like to offer up a third guarantee: retirement planning.
Now we know that "death, taxes and retirement planning" doesn't exactly roll off the tongue, but data shows that people are living longer than ever before, retiring earlier, consuming just as much and still not thinking about their future. Retirement is changing. Need proof? Here's the pudding.
People are living longer. Statistics Canada tells us that between 1979 and 2004, life expectancy at birth rose by 5.3 years. Over the same period, life expectancy at age 65 (which is always higher than at birth) rose by 2.6 years.
Statistics Canada — quite sensibly and cautiously — assumes that longevity will continue to increase, but at a slower rate than in the recent past. That means you can expect to live beyond the 77.8 years for men and 82.6 years for women average life expectancy at birth. Canadians who have already reached age 65 years see their life expectancy increase to nearly 83 years for men and the 86 years for women. In fact, a couple aged 65 can expect that there is a 25% chance one of them will still be alive at age 94. Since your objective is to ensure that you don't outlive your retirement assets, your plan should be based on living longer than the numbers cited by Statistics Canada.
People are retiring earlier.> Twenty years ago, the median age of retirement was 65. Now, it is 61. Combine that with longer life expectancies and it is easy to see that a new retiree could experience a retirement as long, or even longer, than their working lives. Median retirement ages aren't static. The long-term trend has been down, but they also fluctuate with the business cycle (to put it more bluntly, companies tend to "retire" more employees when economic times are tough). Those who look closely at the statistics will also note that the median retirement age has begun to creep up again, but it is too early to tell if the long-term trend toward younger retirement is beginning to reverse.
People don't necessarily plan to downsize their lives in retirement. It has been a basic tenet of retirement planning that people downsize when they leave the working world. Some are forced to downsize because of financial constraints; others downsize by choice. But increasingly, clients are planning to maintain their lifestyle in retirement. A few even attempt to upsize. Recent research at Fidelity concluded that a replacement rate of 75 to 85% of pre-retirement income is required to maintain pre-retirement spending.
People make uninformed choices between consuming and investing. The choice between consuming now and investing to be able to consume more in the future is one of the oldest economic problems out there. Obviously, you need to consume, but you also need to invest in your future by saving for retirement. There are no simple answers as to how to make these choices. Every person's situation and attitude is different.
Some people focus too much on short-term issues when investing. You face plenty of distractions when you invest. Day-to-day fluctuations in financial market performance and the reams of investment news bombarding you every day can get in the way of a longer-term focus. Poorly performing equity markets mean RRSP contributions will fall. What many fail to grasp is that making regular retirement savings contributions and investing them — even if the return is temporarily low or negative —is the single most useful thing they can do to prepare for retirement.
Don’t miss the point of investing early and regularly. Recently, Fidelity looked at over 250 30- and 15-year savings horizons between 1956 and 2006. Assuming a retirement age of 60 (one year less than the current median retirement age in Canada), and a portfolio invested with a balanced asset allocation, they examined how an individual saving a given amount of money per year (say, $1,000, $10,000, etc...) starting at age 30 would fare at retirement compared with one saving twice that amount, but starting 15 years later at age 45.
The results are well worth reviewing. On average, the individual who saved half as much but for twice as long (30 vs.15 years) ended up with nearly three times the wealth of the individual who saved twice as much, but for only half as long. In fact, historically the late starter needed to save close to six times more per year to accumulate the equivalent wealth of the early starter at retirement
Furthermore, even over the worst savings horizon, that is, when saving less for longer was least advantageous, the early starter still amassed 95% more at retirement than the late starter. Over the best horizon, the early starter was ahead by a whopping 260%.
Much of this may sound frighteningly familiar. Yet, there is a fairly new branch of economic thought — "behavioural economics" — that is finally grasping what advisors have known for years: people don't always act rationally, they don't necessarily have will-power and retirement outcomes are poorer as a result.
We believe that you still have to maintain your faith in a prosperous retirement. In order to reap the benefits of careful planning, you must plan ahead. Everything begins with the plan. We believe that planning is the first and most important step in working with our clients. So, why is a written plan so important?
When people buy investment funds without a written investment plan, we often find that they have many funds from various sources that are very similar in investment style. Even though these funds are from several well-known fund companies, and the funds may sound different, in effect they are remarkably similar, resulting in an anomaly called “perfect positive correlation”. This leads to a significant and unnecessary increase in volatility and lower-than-possible returns over the long haul. The result tends to be a very disorganized portfolio that has been put together on an ad hoc basis and one that is not suitable to you.
Our proven Portfolio Tune-up service cleans up your portfolio and provides you with a mutually agreed upon written investment policy statement (IPS) so that you can feel confident that you have a portfolio that meets both your short-term and long-term return expectations.
This way, we can help you effectively conserve and multiply your wealth – while finding security in an otherwise insecure world. At RJ Rau & Associates every product we sell has a guarantee, and we believe that should apply to your investments as well.
While we can’t control the markets, we can control how you interface and interact with them. The following links illustrate some of the major elements we consider and strategies we utilize when constructing your custom portfolio…
Putting the "Plan" in the financial planning process:
”Because a well-documented financial plan forms a crucial bond between client and
advisor, it's hard to believe that advisors wouldn't have a plan in place for every
one of their clients”…
Using correlation analysis to enhance returns
"Many investors may not be as diversified as they think-it's really a question of fund correlation”…
”With market conditions and investor objectives constantly changing, portfolio rebalancing must be performed diligently to ensure an investment mix has not veered from its target weightings”…
The portfolio approach to taming emotions
”For many, investing is not always a rational decision - it's an emotional one”…
“Who says there’s no such thing as a free lunch?”
Most people fit into one of three retirement.
We can help you through the often difficult process of determining your goals, and creating a plan you can live with to turn your goals into reality. Whether you are planning your retirement for some point in the future, or if you are already retired, we have the resources to assist you.
Contact us today for a free style analysis, and to find out the answers to these questions.