Wouldn’t it be nice if you could go back in time and change some things? Well unless you have a hot tub time machine, that ain’t gonna happen – but you can plan to prevent future regrets. Here are some regrets of pre-retirees and retirees…
Wishing they had saved more money
Financial planners typically urge clients to save more, and as to whether this is a wise strategy, the proof is in the pudding so-to-speak. Investors tend to grasp the import of this on an increasing scale, directly proportional to their age. This will unfortunately be much moreso true for future generations who may not be able to rely on the same level of pension benefits, government benefits and Medicare coverages, not to mention investment returns (due to low interest rate environment) as previous generations. If today’s retirees feel they haven’t saved enough, the situation isn’t going to get any better for tomorrow’s retirees.
So how much should we save to avoid regret later? Everyone’s number is different and depends on variables like how much income you’ll need – or want in retirement, what you’re getting for government benefits and any pensions you’re fortunate enough to have, how much you’ve saved so far, and how you invest.
Once you know how much to save, the surest way to be certain you will continue to save for retirement is to prioritize your retirement bucket by setting it aside before you even have a chance to spend it. One of the advantages of employer-sponsored plans is that they do this for you and deduct the savings right out of your paycheques. You can also set up an automatic periodic transfer from your chequing account to a separate savings or investment account. This is a very prudent and wise practice to adopt.
If you can’t afford to save enough right now, try slowly increasing your savings rate over time – but do start today, even if only at a very small monthly amount. The idea is to get out of the starting gate. Procrastination is the thief of time… don’t become a victim. You probably won’t notice much of a difference but you’ll eventually be saving more than you ever thought possible. See if your employer’s retirement plan has a contribution rate escalator feature that does this automatically for you, or you can make a note on your calendar to bump up your savings rate a little bit each year.
If our financial planners are telling us to save more, our doctors are telling us to eat better, start exercising, and get more rest. But financial and physical health are actually more connected than they may seem. Obviously, the better health we are in today, the less we will need to spend on care.
But it works the other way too. One of the biggest causes of illness is stress – and financial stress has been called the #1 cause of many illnesses. People with high levels of financial stress have reported more migraines/headaches, insomnia, high blood pressure, stomach ulcers, muscle tension/back pain, severe anxiety, and severe depression than those with low levels of financial stress.
So what can you do? First, be honest about your financial difficulties and tackle them head-on rather than letting them fester. If you have debt collectors calling, stop ignoring them and take steps to deal with them. That could mean looking for ways to save money to put towards your debt, negotiating an affordable payment plan with your creditors, working with a reputable credit counseling agency, or even filing for bankruptcy protection. No matter which of these steps you take, you’re likely to feel better than letting the problem linger and wear down your health.
Making the right investments
Not saving enough isn’t the only reason for retirement shortfalls and debt isn’t the only cause of financial stress. Not understanding your investments can also be a culprit with either or both. The “secret” is to engage a professional investment advisor who will simply make sure you’re properly diversified, rebalance your holdings regularly (to keep you within your risk profile), and coach you to stick with your plan through the ups and downs of the market.
Your investment advisor will also keep you properly balanced. Let’s say you’re a “balanced” investor, with 60% equities and 40% bonds. Now let’s assume that equities do extremely well. This could cause your “balance” to end up being 70% equities and 30% bonds. That’s off your target, and is too aggressive for your risk profile. To rebalance to your strategic portfolio (60/40) some equities will have to be sold, and some bonds will have to be acquired. This will shift your portfolio back to 60/40. If equities take a downturn and end up being only 50% of your portfolio, you’d do the opposite and move money from bonds to equities to bring them back up to 60%.
This strategy makes you adhere to a fundamental investment rule – buy low and sell high, without trying to time the market. Your employer’s retirement plan may make this even easier if it has an automatic rebalance feature that does this for you, typically every quarter.
The next step is to determine how to allocate your portfolio between different investment classes such as equities (stocks), bonds, mutual funds, and cash. The right mix depends on your objectives, how long you intend to keep your money invested, and how much risk you’re comfortable with.
Next, make sure you’re diversified within each asset class. The easiest way to do that is with mutual funds. So which funds should you choose for each category? Everyone knows that chasing performance is a fool’s game. Last year’s winners could very well be this year’s losers. The wise investor would consult with an experienced investment advisor to help with the construction of a portfolio that would be consistent with his or her risk profile, and is designed to help the investor to reach his or her objectives.
Finally, many seniors opt to keep their investments on track by making their portfolios more conservative as they get closer to their goals.
By far the vast preponderance of investors are much more comfortable engaging an investment adviser to handle their investment decisions, especially those investors who want or need more comprehensive financial planning advice, including tax planning, estate-transfer matters, gift-planning, etc. The problem is that there’s a wide variety of investment advisors out there. Look for someone with professional planning designations like a CFP(R), CLU(R), and/or TEP(R) – or professional investment designations like a CIM(R), and/or is a Portfolio Manager. You also want to confirm that your advisor works on transparent fee-based compensation program as opposed to non-transparent commission-based. Finally, it is also important to ensure that your investment advisor serves in the capacity of a fiduciary – meaning that they place your interests ahead of their own. If your advisor not prepared to unequivocally state that he puts your best interests first, find an advisor who will so state.
While it would be nice to have a time machine, taking steps now to avoid regret later is the next best thing. Think about it… when you reach retirement age you will look at your financial picture and peer back to your younger self in wonder and exclaim: “Wow, was I ever smart to plan so far ahead!”
As always, please do not hesitate to communicate with the writer if you would like additional information on this topic.
Joel Attis is a Senior Financial Advisor with AttisCorp Wealth Management and IPC Investment Corporation. Comments or questions may be submitted to Joel at email@example.com, or he may be reached at 855-1155.