SAVING FOR LIFE
Rising life expectancy is generally regarded as a positive trend. But the prospect of living until the age of 90 also carries a certain anxiety when it comes to retirement planning. Arvind Jain, a professor in Concordia University’s department of finance in the John Molson School of Business, has looked closely at investment behaviour during financial crises. But even during less turbulent times, Jain says that by the age of 45, most people have faced a personal reckoning over whether they will have saved enough money to retire comfortably.
“It’s a common wake-up point,” Jain said. “At the age of 45, there’s still time for change but it usually means people have to cap their spending by making some lifestyle changes that aren’t necessarily appealing.”
Jain cautions that the longer a person waits to seriously invest for retirement, the less risk they can take with those investments.
“When crises hit the financial sector, the value of investments drop but then recover in the following years,” Jain pointed out. “But if you’ve reduced your investment horizon from 40 years to just 15 or 20, you’ve also reduced the degree of risk you can have in your portfolio and that limits your options.”
Jain also warns that today’s financial markets are challenging traditional rules of thumb in the investment field.
“We expect higher volatility in market prices to remain for some time,” Jain said. “Unprecedented low rates of return are also expected to remain low in the coming years.”
That means stable, low-risk investments such as treasury bills barely give a return higher than the rate of inflation. Bonds carry a medium level of risk while stocks carry the highest.
Jain remains a believer in Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs) as an essential base for boosting retirement income beyond government and employer-subsidized pensions.
Jain likes the RRSP strategy, for example, because the capital invested reduces your taxable income. There is a cap to how much you can invest, however, and when you cash in RRSPs, they then become a taxable income. Still, Jain cautions that even if you’ve invested the maximum 18 per cent of your earnings in RRSPs throughout a 40-year working life, that money has to last the 30 or so years of your retirement.
At that point, it will only be giving you about 25 per cent of what you earned in salary.
On the other hand, the earnings in TFSAs aren’t taxed at all — not even if you use these funds to invest in stocks or bonds. Plus, the interest on TFSAs is set above the expected rate of inflation, unlike other accounts where rising inflation rates may actually eat away at your capital.
So a good strategy is to use both. Since you get tax returns on RRSPs, Jain recommends putting what you get back into TFSAs.
“The two happen at different stages in your savings process,” he said. “RRSPs come first. If you have money, put it into RRSPs. If you have more money, put it into TSFAs.”
Whatever the chosen investment route, Jain advises getting onto a savings track as early as possible in your income-earning years and emphasizes the importance of consulting a qualified investment adviser who can help evaluate the best way forward based on all assets, earnings, personal and family situations.
“Humans are emotional animals,” Jain said. “Retirement forces you to think about doing something you really don’t want to do, so you postpone the need for thinking about this to later.”
Jain points out it may help to bear in mind the undeniable fact that, in economics, you can’t consume more than you produce.
“People have to understand that when you earn an income, that’s when you have to plan for when you won’t earn an income,” he said. “When you retire, you don’t earn what you consume.”
Read more at: concordia.ca/jmsb
The prospect of living until the age of 90 also carries a certain anxiety when it comes to retirement planning.