By Karin Mizgala, CEO and Co-founder, Money Coaches Canada
In part one of this post, I wrote about financial and investment considerations for those in their 20s. If you read that article, you may remember that I mentioned time as being one of the greatest assets young investors have. Time to take advantage of compounding interest. Time to bounce back from dips in the market. Time to create financial habits that will serve them throughout their life.
But time is only part of the equation. Investing is not a matter of filling your financial crockpot while you’re young and letting it simmer, unattended, until you retire. Your investments need to “feed” you throughout your life, not just in your senior years. You have to lift the lid on that slow cooker and keep an eye on things. You do that with an annual investment review.
Life Changes That May Impact Your Investment Strategy
We all know the adage; “the one constant is change.” We know it because it’s true. The years seem to fly by, but if your look back on the last 12 months of your life, a lot has likely happened that could impact your investment plan. Have any of these events happened in your life recently?
- Birth of a child
- New Job
- Job promotion
- Loss of job
- Health issues (for yourself or a loved one)
- New Home
- Child goes to university
- The unexpected (major home repairs, an extended family member that needs assistance, or any other out-of-the-blue circumstance that affect your finances)
Just one of those events can have a huge impact on your finances, and many of us will deal with two or more—sometimes within a very short time. (And don’t assume that “unexpected” category won’t impact you—just think about the hundreds of people in Ottawa last month whose lives were significantly impacted when six tornadoes touched down).
An annual investment review is the best way to make sure your future goals and your present needs are both on track.
But before I discuss the investment considerations of those in their 30s/40s and those 50+, I want to restate the list of investment considerations for investors of all ages, that I included in part one.
Investment Considerations for Investors of All Ages
Investing is never a one-size-fits-all formula, but, there are some principles that apply to most investors.
- Starting sooner is better than later—Compound interest (earning interest on your interest), is the “magic formula” of investing, so the sooner you invest, the more time you have to benefit from this multiplying effect.
- Keep some funds easily accessible. Having an emergency fund in a savings account, guaranteed investment certificate (GIC) or money market fund, can give you peace of mind at all stages of your life.
- Strike a balance between the best return on investment and your comfort level. Having some of your savings in stocks can help offset the diminishing effect of inflation on more traditional savings. But it’s important that you can afford that risk financially and emotionally. Investments that affect your sleep are not ideal.
- Schedule an annual review with a professional. I know I keep saying it, but this one habit can have a huge impact on your financial future. Keeping your investment strategy at pace with your life is essential to long term success.
- Understand how your investments impact your taxes. Some investments are taxable, while others are tax deferred or tax free. It’s important that you consider the tax implications at the time of investment, and when it’s time to make a withdrawal.
It’s important to remember that although I’ve divided investment strategy into 20s, 30s/40s and 50+; that is only for the purpose of this article. Everyone’s life path is unique, and it’s important to speak to a financial professional to create the best strategy for your circumstances.
Financial and Investment Strategies for Those in Their 30s and 40s
Many people hit their career stride in their 30s and begin earning more money. (This may also be a good time to invest in further education or skill development courses). Couples combining income often find they have more money than ever before. Of course, along with this greater income, often comes greater responsibilities—like children and home ownership.
There can be tough decisions to make about how much you can reasonably put in an RRSP at this time, but don’t let your future fall off your radar. Make as large a contribution as you can manage, you still have time working for you, so even a small contribution has time to grow.
It’s important, given that you have greater responsibility for other people’s well-being, that you have a will. You also want to ensure that your RRSP will be transferred to your spouse with no tax consequences in the event of your death by designating a beneficiary on your account.
What you don’t want in your 30s (or anytime), is to start living above your means. This can be a challenge at this stage of life, because you have more money, you want things for your children and for yourself, and it feels like you have time to pay back any debt you may incur. But the habit of overspending can be hard to break, leaving you in a cycle of revolving debt.
As you hit your 40s, you are likely approaching the height of your earning power, and it’s time to start maximizing your RRSP contributions. If you have additional money to invest, consider using a Tax Free Savings Account (TFSA). This is a good time to educate yourself; make sure that you know what you’re paying in fees, and that you understand how your investments are performing. You don’t need to become an expert in the investment field, but you should feel confident that you have the right investment vehicles for your goals.
Financial and Investment Strategies for Those in Their 50s or Approaching Retirement
By this stage of life, it’s particularly important to have a clear vision of your retirement goals and expectations, because you have decisions to make. I suggest you read our blog post “Are You On-Track to Retire in 10 Years?”
Some of the things you will want to discuss with a financial advisor include;
- At what age do you hope to retire?
- Depending on how close you are to your retirement date, it may be time to consider shifting your money from stocks into lower risk bonds or other fixed-income securities. There may be less growth, but more peace-of-mind that the money will be there as you need it.
- If you will have other income sources in retirement, such as a pension (or perhaps you intend to work part time), then you may not need to access your investments as soon. In that case, it may make sense to stay invested and let your money continue to grow.
- When do you plan to apply for CPP? While in general it makes sense to hold off until at least age 65, your health and/or financial need may make applying earlier a better choice for you.
- When will you convert your RRSP to a RRIF? An RRSP is a savings vehicle, converting it to a RRIF makes it an income source. You must convert your RRSPs into RRIFs by the end of the calendar year in which you turn 71, but you can convert them earlier. Money taken from your RRIF is taxable, so knowing how to minimize the impact on your taxes is important.
Whatever you do, don’t let the list of considerations overwhelm you. There are financial professionals who can help you decide which strategies work for you. The one thing that only you can do for yourself, is stay engaged with your financial needs and goals. Meet with a money coach or investment specialist each year to ensure your money, and your strategies to protect and grow your financial well-being, are keeping up with your life.