LIFE STAGES
As you age, investment strategies take on new wrinkles
BY JEFF BUCKSTEIN
When the world’s stock markets started wobbling last month, many investors with equities in their RRSPs eyed the gyrations with trepidation, wondering whether to make major changes.
Not Steven Csaki. The 40-year-old Toronto software consultant is hanging tight. “I’m not really worried about market volatility right now. I believe RRSPs are long-term investments and I’ve got a long period of time before retirement funds are going to be needed,” says Mr. Csaki, whose portfolio is heavily weighted with growth-oriented equities.
In fact, his stay-the-course philosophy is the exact message many financial advisers are trying to convey to nervous RRSP-holders across Canada.
“Our role as financial planners is to make sure clients are not panicking,” says Judy Thomson, the Toronto-based director of BMO Retail Investments, part of BMO Financial Group.
Recent instability aside, no matter what stage of life you’re at – just starting out, in your peak earning years, or closing in on retirement – experts stress that the overriding goal behind an RRSP is to structure it in such a way that it fits your long-term financial goals.
Ms. Thomson notes that beginning in your twenties, when “perhaps your finances aren’t as robust as you would like them to be, it is important to start asking basic questions such as how much can realistically be put aside for a consistent RRSP contribution; as well as the proper asset allocation and the amount of risk one is prepared to take.”
The twenties and early thirties are the formative years when RRSP-holders are busy laying the foundation for a solid retirement fund. A good way to do this is by dollar-cost averaging: setting up a savings plan that contributes funds to your RRSP on a biweekly or monthly basis, making regular purchases to take advantage of both ups and downs in the market.
Thanks to the benefits of compounding, young people can accumulate quite a nest egg if they start early.
Ms. Thomson offers the example of a 22-year-old just out of university, who starts investing in his RRSP to the tune of $200 a month. Over a period of 43 years, he will see his retirement savings grow to about $976,000 on a tax-deferred basis by age 65, assuming an annual rate of return of 8 per cent.
In a perfect world, experts say, a person would set up an RRSP at the beginning of his career, put in the maximum amount each year, and never touch it for any reason. But no world is perfect.
For many Canadians, the period from their thirties until about 10 years before they retire is the time when they experience the biggest changes in life, including marrying, buying a home and raising children.
“This is where you are balancing a number of different commitments,” says Elaine McHarg, senior vice-president and chief marketing officer with Credential Financial Inc. in Vancouver. They include paying for a mortgage, saving for your children’s postsecondary education, and perhaps caring for aging parents as well.
“Your financial responsibilities tend to be expanding at this stage, [but] you don’t want to lose sight of the RRSP contribution.
“You should be as aggressive and take on as much risk as you can at this point,” to achieve maximum growth but also focus on maintaining the proper diversification within the RRSP portfolio, she emphasizes.
As you begin to close in on retirement, say about 10 years before, that’s when you need to do a thorough assessment of how much you expect you will need once you leave the full-time work force.
“A lot of people don’t really start envisaging their retirement in a clear manner until about five years before, and that’s a little late to be able to make really big changes in your investments,” Ms. McHarg says. “What you want to do is try to get a picture even 10 years out as to what you think your priorities are going to be.”
And retirement itself is far from a dead end in terms of still needing financial growth, the pros advise.
In fact, the definition of how an RRSP portfolio should be structured relative to age might not follow the stereotypes worked out a generation or two ago. They usually suggest shifting to a much more conservative mix just before retirement, notes Dan Bodanis, a senior financial adviser with Dundee Private Investors Inc., in Mississauga, Ont.
But he points out that Canadians, on average, live a lot longer than in generations past, thanks to improved health care and medical advances. “It’s possible somebody could live an extra 10 or 15 years, or even longer, beyond what the previous generation lived in retirement,” Mr. Bondanis says.
“Therefore, the big risk is not in losing your money when you invest it, but in outliving it,” he stresses.
This means planning your investments well past age 71, the age at which an RRSP must be terminated. And because people are living longer – some of us can expect to live well into our 90s – significant numbers are going to want their investments to continue generating interest in a registered retirement income fund. As well, many people like to leave something for future generations.
Bearing that in mind, Mr. Bodanis says, you might want to plan for a much larger “aspect of growth” in your portfolio than traditionally suggested, “to sustain longevity and to outpace tax and inflation.”
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Not Steven Csaki. The 40-year-old Toronto software consultant is hanging tight. “I’m not really worried about market volatility right now. I believe RRSPs are long-term investments and I’ve got a long period of time before retirement funds are going to be needed,” says Mr. Csaki, whose portfolio is heavily weighted with growth-oriented equities.