The investment component you control
You can’t determine how the markets perform, and you can’t control the return on your investments – unless, of course, you only have guaranteed investments. But you do have control over the amount you save and invest.
For some investors and in certain situations, the need or opportunity may arise to increase the amount they invest. Here are three such situations.
Becoming less tolerant of risk
When goals change
Capitalizing on opportunities
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Managing risk in retirement
Our retirement years come with several financial risks, but fortunately, you can take measures to help defend against each one. Many of these measures begin well before retirement.
Here are some more common financial risks, along with strategies to reduce each one.
Longevity
Canadians are living longer, but increasing longevity poses a risk – a retiree outliving their savings. Today, retirees may need income to last 20, 25 or even 30 years.
Safeguarding against this risk begins with determining your retirement savings goal. You can find all kinds of calculators online, but we take a detailed and customized approach to arrive at a goal and retirement date you can regard with confidence.
During retirement, various methods are available to help your savings last your lifetime. A couple may split their pension income to pay less tax. A retiree may defer government benefits to receive higher payments at older ages. A risk-averse individual might purchase an annuity for a steady stream of income for life. These are just a few of the many strategies to help ensure you won’t worry about outliving your savings.
Inflation
Not too long ago, in June of 2022, inflation in Canada reached a 40-year high of 8.1%. Canadians may feel comforted that inflation is now around the Bank of Canada’s 2% target range, but investors shouldn’t be lulled into a false sense of security. Even a 2% inflation rate can have a significant impact on your investments. That’s why inflation is sometimes called the silent thief of retirement savings.
Helping to control this risk involves two measures. First, the effect of inflation is taken into account when determining your retirement savings goal. Second, investments – especially low-risk investments – should offer yield or growth that aims to outpace the inflation rate.
Market volatility
Before retirement, market downturns can be buying opportunities, but there’s no such silver lining during retirement if you’re not investing new money.
How does a retiree deal with market volatility if they still want some growth in their portfolio? One factor involves the time horizon. A retiree may feel comfortable holding equity investments in the earlier years of retirement, knowing the markets have time to recover in the event of a downturn. However, as the years progress, any retiree’s portfolio is typically adjusted to become more conservative.
Some retirees use a cash reserve to safeguard against market volatility. In a year when equity investments lose value, they draw retirement income from a pool of low-risk investments.
Very conservative investors can simply hold little or no equity investments, favouring fixed-income and guaranteed investments.
Long-term care
The impact of inflation
Purchasing power of $100,000 after 20 years
Even relatively low inflation rates have the potential to greatly diminish the purchasing power of savings. This chart is for illustrative purposes, showing the impact of inflation on savings that do not earn interest.
Are you a member of the sandwich generation?
What happens when many couples are having children in their 30s or even 40s, and their parents are living longer? You have the sandwich generation – Canadians financially supporting their children while caring for their parents.
Supporting children
When the term sandwich generation was first coined, the children in mind were young. But today, the sandwich generation’s children include young adults. According to Statistics Canada, 35% of young adults aged 20 to 34 live with one or both parents, many requiring financial support.1 Also, parents may help children who have moved out, either to meet their cost of living or contribute toward a down payment on their first home.
Caring for parents
Helping one or both parents can be through financial support or providing care. Financial support may include expenses related to home modifications, private home care or an assisted living facility. Having the money talk with parents isn’t always easy, but you’ll want to know whether their income and savings will cover these expenses, so you can plan accordingly.
Typically, providing care involves helping out with one or more of household chores, meal preparation, personal care and coordinating care. Many sandwich generation caregivers reduce their work hours or take time off to care for a parent. A Canadian survey shows that decreased income from helping parents results in 63% of caregivers reporting financial hardship.2
Making it work
Helping your children and parents can be emotionally stressful and exhausting, so it’s important to take care of yourself too. It’s also important to have a wealth plan in place, to help avoid being one of the sandwich generation members who suffer financial hardship. You’ll want to estimate the costs of supporting your children and parents, then develop a strategy to manage any impact your support may have on your wealth plan and retirement savings. We’re always here to assist you in creating a plan that meets both your immediate and future needs.
1 Statistics Canada, Census of Population, 2021
2 Canadian Centre for Caregiving Excellence, National Caregiving Survey, 2023
Is all money the same?
One hundred dollars is one hundred dollars, right? Well, if you found a $100 bill on the sidewalk, would you use it the same way as $100 you earned?
This idea is known as “mental accounting,” a term coined by behavioural economist Richard Thaler in 1985. According to the mental accounting principle, we may value a sum of money differently depending on how it’s received or its intended goal.
A topical example is the upcoming tax refund many Canadians will receive. Some people view their refund as free money, like that $100 bill on the sidewalk. Though a refund may seem like a windfall, it’s your own hard-earned money that you overpaid in taxes throughout the year. So the financially sound decision is to use the funds to invest or pay off debts.
Though mental accounting can tempt us to spend frivolously, it can also benefit us. For example, we can view money in an emergency fund as untouchable – until a genuine emergency arises.
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