It’s begins with your first savings account and—if all goes according to plan—ends with a comfortable retirement. Along the way, you’ll have different priorities and your investment strategies should reflect that. But one thing’s for sure: the earlier you start saving and investing, the better off you’ll be in the long run.
With that in mind, it’s important to develop good saving habits early on. This means making regular deposits to your savings account and then investing that money wisely. How you invest should depend on three main variables: your age, risk tolerance and priorities.
Generally, the older your get, the less risks you’re going to want to take with your investments. The reason is: if you lose some money in a risky investment when you’re young, you have time to rebound and make that money back. But when you’re older, you often don’t have the option to start over and earn more money.
During this phase, it can be hard to save because you’re just starting out. You likely aren’t earning a whole lot of money, and there will be expenses that can chip away at your savings. Regardless, you should still make an effort and save what you can.
Your first priority should be to contribute to an emergency fund. You never know what bumps in the road you’ll encounter, so an emergency fund is vital. Create a separate account, so you aren’t tempted to dip into it. And if you invest it, make sure the investment is liquid, so you can access the money anytime you need it. Typically, most financial advisors say you should save enough to cover all your expenses for at least three months.
Next you want to focus on paying down any debts, whether it be student loan, credit card debt or other loans. Try topay off the debts as quickly as possible. And remember, the more you pay towards the principle, the less you’ll pay in interest over time.
Finally, if you have any money left over, it’s time to start your retirement fund. Like we said, the earlier you start investing, the better.
At this point in your life, you’re starting to earn more money and can usually afford a higher risk tolerance. That typically means having a higher percentage of stocks in your portfolio. Just make sure you diversify (an easy way to do this is through a mutual fund). Time is on your side, as they say, so if an investment doesn’t pan out, you should have time to make up for it.
If you haven’t started a retirement fund, you should open a Registered Retirement Savings Plan (RRSP) as soon as possible. Any money you contribute to your RRSP will have the tax deferred until you withdraw it, preferably in retirement when you’re in a lower income bracket. It’s a great way to invest with added tax benefits.
You also might want to open a Tax-Free Savings Account (TFSA). With a TFSA, you don’t pay any taxes on your investment earnings. The amount you can contribute to your TFSA varies every year and any unused contribution space carries forward, so you might want to talk to us to figure out how much room you have.
This is also around the time when many people start a family. It is a great period of your life, but there are also some expenses to be considered, including a wedding, mortgage and the costs associated with having children. You should plan and set aside some of your investments for each of these expenditures.
At this stage, two common focuses include: children who depend on you and growing your retirement funds. You’re older now and have less time to rebound from an investment that doesn’t work out, so stable investments and a stable job become more important than ever.
You might want to consider making less risky investments for a larger percentage of your portfolio compared to the last phase. One example that you might want to consider are Guaranteed Investment Certificates (GICs). They offer a guaranteed rate of return over a fixed period of time with no risk of losing your principle investment.
Next, you should start thinking about your child’s post-secondary education. Post secondary education is expensive, start saving as early as possible. One of the best ways is by opening a Registered Education Savings Plan (RESP). It works like this: you make contributions, but any investment income is taxed at withdrawal at the student’s tax rate, which is typically much lower than your own. RESPs are also eligible for government grants, called Canada Education Savings Grants.
When your children do move out and become less dependent on you, it’s time to really increase your retirement savings contributions. Keep adding to your RRSP and TFSA until they are maxed out, then move into taxable investments.
Congratulations—if you’ve saved regularly and invested well, you should have the funds to carry you through your retirement. At this point in your life, you are in your last earning years or have reached retirement, so you should be very conservative with the money you’ve saved up—that means avoiding risky investments.
It’s also important to note that at age 71, your RRSP will be transferred into a Registered Retirement Income Fund (RRIF), which will make payments to you throughout your retirement. You’ll pay taxes on the amounts you receive, but it’ll likely be at a much lower rate than when you made the RRSP contributions and were in a higher tax bracket.
Hopefully, you’ve learned some helpful strategies for the phase of life you’re in right now. As always, the most important thing is to save early and often. If you’d like to talk further about investing, our financial advisors are always standing by, ready to help.