I’M 31. DO I HAVE TO SAVE JUST FOR RETIREMENT?
Q: I’m 31 years old and new to saving and investing. This may sound like a silly question, but do I need to just save for retirement? Almost everything I read or watch about investing is always tied to your retirement funds, but can you invest just to make some extra money to be used in, say, five to 10 years from now? What if I want to throw some money into index funds and let it grow for a few years, then cash out to pay for school, buy a new car or put a down payment on a house? Do you have to invest with the mindset of “this will be there for 40 years, then it’s mine?” — Janine
FP Answers: Janine, you are bringing up two semi-related topics: why everything is tied to retirement planning (“because it’s easy”), and how to save for shorter-term goals (“maybe you shouldn’t").
If you think about it, preparing a basic retirement plan is easy because the math is simple and straightforward. The three main questions that have to be answered are: At what age do you want to retire? How much income do you need? And how long will the money last?
Other than your income needs, I don’t need to know a thing about you to build a plan or write about it. Once the math is done, I can dress it up a little by talking about all the things financial planners love to talk about, such as when to start Canada Pension Plan (CPP), tax efficiency and draw-down strategies.
Doing a retirement plan such as this saves a lot of time, can be done with simple software and shows off the planner’s knowledge. The problem is that it may not connect with the person wanting a plan.
Missing is all the good stuff you are asking about, including key points such as making credible and actionable plans while instilling confidence. But it doesn’t have to be a retirement plan. It can be a life plan starting at age 31 that encompasses your thoughts around your home, family, lifestyle and career.
Imagine if a planner took the time to find out more about you as well as what you want to achieve, and then tried to incorporate that into a plan. Suddenly, planning becomes complicated, ongoing and takes on a project management approach. That is not something easily written about in one article, but that approach is what you should expect when working one on one with a financial planner.
This is where short-term goals come out and savings strategies are developed. I like to follow the lifestyle planning approach before setting goals. The lifestyle approach looks at your current situation today and where you want to get to before you are dead and gone. It looks at your current and anticipated future financial resources so you can see what is possible. Then you set goals and determine what you must do to meet your goals.
If you can’t identify many future goals, that’s OK. You are not alone. Most people can’t. But the one thing I suspect everyone wants is a comfortable lifestyle. They want to maintain and enhance their lifestyle over their lifetime. Nobody wants to lose what they have.
Janine, you might like to save for a car and a down payment on a home, which are very sensible fixed goals for a young person. In addition to fixed goals, there are goals that often change or fade away, meaning what was important in the past isn’t important anymore.
For fixed short-term goals, it is best to invest in something where your principal and earnings will be available to you when you want it. These types of investments tend to earn lower long-term returns and are more heavily taxed. However, you don’t have much choice unless your goals are flexible.
There are tax-efficient investing accounts. For a house, the new first home savings account (FHSA) is an excellent investment account to use if you qualify. There is also the tax-free savings account (TFSA). If you owe money on a line of credit, there is nothing wrong with paying it down and re-borrowing to meet your goal.
For goals that may or may not happen, you must decide if you want to set up dedicated investment accounts for them or not. For a goal-oriented person, it may be the best approach. If that is not you, it may be better to set up the account for the car and house, but invest the rest of your money in a portfolio suited to you and your long-term needs. If you don’t, you may find yourself neglecting your long-term needs for short-term goals that are never realized.
Janine, you need to take a balanced approach to investing and goal setting so you have a good life now and in the future. You make a good point that most of what you read is based around retirement planning. The challenge for writers is that you are not in the room, so they must write about what they know. They provide a snapshot of a person’s circumstances along with some planning ideas to help you think.
This is not real planning. It becomes real when you are in the room discussing your lifestyle and thinking about your future.
Allan Norman provides fee-only certified financial planning services through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. Allan can be reached at alnorman@atlantisfinancial.ca