Building your Financial
Success
With Alain Aube
Planning for financial success
Plan for life: The life cycle approach
to investing
It has been said that life is what
happens while you're busy doing other things.
And, in a very 'real life' way, that's
true. Most of us have longer-term goals and objectives for our lives -
and that usually involves accumulating enough wealth to have an
enjoyable retirement. But, keeping your eye - and investment focus - on
your longer-term goals can be tough, verging on impossible when the
'mini-crises' and multitasks associated with raising a family or finding
this month's mortgage payment constantly take day-to-day precedence.
That's where the life cycle approach to
investing comes in. It works by letting you manage your finances so they
match the circumstances and priorities of your life in its different
stages while maintaining the right investment strategy to meet your
long-term goals. There are three stages in the life cycle approach, each
taking into account your financial needs and ability to save at that
particular point in life.
The savings years (ages 25-40)
Younger people typically have higher
expenses and a lower available amount to invest than more mature folks.
These are usually the years when you're dealing with a home down
payment, a mortgage and the many other expenses of raising a family.
But, you can't afford to ignore the need to save. Money put away at this
stage has longer to grow and can contribute substantially to your
retirement.
That's why you should think about
maximizing the growth of your tax-sheltered Registered Retirement
Savings Plan (RRSP) - a tax-efficient way to build a retirement fund.
This is also the stage when you can generally take more risk in your
investment choices. More volatile investments like equities can produce
higher returns in the long run, but have more volatility in the short
run. With a long time horizon you afford to pay less attention to the
ups and downs of the market. Mutual fund investments with a strong
equity component are a good way to include this high-potential long-term
growth element in your portfolio while reducing the impact of volatility
in individual stock prices by being well diversified.
The wealth-building years (ages 40-60)
By this life stage, your income is
reaching its peak, the mortgage may be paid off and you've likely
reduced or eliminated other debt. That means you'll have more capital to
invest. Look first to your RRSP - at this stage it's important to make
your maximum annual RRSP contributions and, if possible, make up any and
all unused contribution room from previous years. With the power of
compound growth, more money sooner in your RRSP can result in much more
money later for retirement.
Early in this stage you should maintain a
healthy proportion of growth investments in your portfolio, but as
retirement nears, you may want to redirect a greater proportion of your
retirement savings into lower-risk fixed-income investments, such as
bond mutual funds or Guaranteed Investment Certificates (GICs).
The retirement years (ages 60 and
over)
This is the stage when you'll probably
need to tap into your accumulated wealth to meet retirement expenses.
With the average life expectancy rising, you might need to maintain your
retirement income for twenty years or more - so planning for your income
needs is a priority.
During the retirement years, it's a good
rule of thumb to focus on capital preservation and to gear your
portfolio to less volatile investments. But, don't exclude growth
investments that can add significantly to your retirement income and
protect against the effects of inflation.
Each of the three stages in the life
cycle approach to investing requires a different investment strategy -
but one aspect should always remain constant: Diversification. A
balanced and diversified investment portfolio is better able to
withstand short-term market fluctuations and can still achieve the
growth you need to reach your long-term goals.
Getting professional help can give you
more insight into how the life cycle approach to investing can work best
for your life.
