Retirement planning can seem challenging. How do you plan for an event that may be so far in the future? How do you know how much money you will need? And how do you avoid many people's biggest fear -- outliving your money?
Here we outline five major trends that will impact your retirement, as well as key steps you can take now to build an investment plan that will provide peace of mind in your golden years.
1. Increasing longevity
Improved healthcare and healthier lifestyles have increased the average life expectancy. As per a recent OSFI report, 65-year-old retirees can now expect to live until age 84 (for males) and 87 (for females). That means your retired life could be almost as long as your working life! When investing for retirement, it would be a safe bet to plan to live until age 95. You will need to build a portfolio that will cover your financial needs throughout your long retirement.
2. Lower return environment
The economy has slowed, and this will likely be the new normal in many countries as growth will be challenged due to lower productivity rates and an aging population, particularly in the developed world. This means the overall return on investments will likely remain challenged, including the return on retirement savings invested. Retirees will need to have a larger amount of assets to fund their retirement at lower rates of return.
3. Higher frequency of turbulent periods
A combination of short-term mindsets (perhaps driven by media headlines focusing on the daily markets) and the desire for "fast money" encourages short-term trading opportunities and makes periods of significant market volatility a more frequent occurrence. We believe these frequent market fluctuations will impact long-term investor thinking, resulting in a general reluctance to take risk. This would have a negative impact on the potential growth in people's retirement savings and its compounding effect in the long-term.
4. Fewer defined benefit pension plans
With many large corporate entities facing profitability and expense management challenges, these organizations are reluctant to offer a defined benefit pension plan (where the pension benefit is guaranteed by the employer) to avoid the incremental cost of supporting the guaranteed pension amount. Many organizations that currently have a defined benefit plan for employees are switching over to a defined contribution plan (no guarantee of future benefits from the employer) in order to avoid the significant costs of providing the guarantee. Also, there is a high probability that Canada Pension Plan and other provincial pension plans will not be enough to cover all your costs in retirement.
The bottom line: You are on your own to fund your retirement.
5. Growing healthcare costs
The aging population and longevity are increasingly burdening the healthcare system. At the same time, costs are increasing and coverage is decreasing. In fact, in much of the 38-year period between 1976 and 2014, healthcare costs have increased by about four per cent per year.
According to the 2014 Canadian Institute of Health Information Report, "as the percentage of the population age 80 and older increases, decision-makers will be faced with the challenge of determining the best ways to provide care for older adults." The report also identifies weaker prospects for economic growth and rapid increases in physician remuneration to have a significant dampening impact on the future growth of health spending by the government.
What this means for you and me is that we will need more savings to fund this shortfall.
Steps you can take
Sounds depressing, doesn't it? But you don't need to worry if you follow a disciplined approach to retirement planning and investing. Here are six steps you can take today to secure your retirement tomorrow.
1) Build a retirement savings plan. While very long-term planning can be challenging, the key is to put a plan in place and revise it along the way. Determine how much you will need to save during your working years to support the retirement lifestyle you want.
2) Pay yourself first. Use payroll deduction and pre-authorized contributions as much as possible. Soon you won't even miss the money, and you can watch your retirement savings grow.
3) Maximize employee benefit programs. Enrolling in your company's plan with matching contributions from your employer is like getting free retirement funds -- don't leave money on the table!
4) Invest your savings with a plan based on your time horizon and risk tolerance. If you have a long time to get to your retirement -- say, 10 years or more -- and need your portfolio to grow to get to your goal, make sure you take the appropriate level of risk to seek a rate of return you need. Remember, risk is not a bad thing. The key is to understand what risk you are taking and manage it along the way. In fact, if you don't take sufficient risk within your portfolio, you may end up with insufficient savings for retirement. Involve an investment professional who can help you understand the risk, guide your plan and manage it for you.
5) Expect volatility in the market. The market will fluctuate and it is important to stick to your plan to ride out these waves. An investment plan with regular contributions is a great way to take advantage of market volatility.
6) Keep your investment costs low. The more you spend on investment fees, the more it adds up and compounds over time, reducing the amount of your savings. If you are currently paying more than one per cent in total costs per year, consider this: are you truly getting value for money? If not, look for alternatives that are currently available to you. You could actually have an extra $26,000 per year in retirement simply by reducing your investment costs.
Pramod Udiaver is the Co-founder and Chief Executive Officer of Invisor Investment Management Inc., one of Canada's leading online financial advisors that provides personalized investment management services. Passionate about personal finance and a student of financial markets himself, Pramod and his team's mission at Invisor is to simplify investing and help Canadians reach their financial dreams sooner.
The earlier you start saving, the longer your money can work for you - get started today!
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