Why You Need To Plan For Retirement
Part 2 of 3-Part Series
We won’t delve into the technical side of retirement planning, that’s a conversation you need to have with your financial advisor. But the broader details are important for you to understand when having that discussion. As the very base of it, money you earn now needs to be invested so it can grow into the amount you need during retirement. The amount you need will be determined by the kind of lifestyle you want to live during that retirement, and the more time you have to invest, the bigger that number can be. Not everything in life needs to be planned, but this is definitely one aspect where earlier is better!
When you start investing for retirement at a younger age, it means there are a lot more years for your money to grow. More risk tolerant investments such as stocks can be afforded because over time much of the risk is mitigated. Ups and downs in the market can be tolerated because it is a long-term play, and you do not need the money for many years. Over time, stocks are shown to be a big winner, whereas in the short term, they are much riskier. As you get closer to retirement, a much safer approach is taken because a dip in the market may coincide with when you do need to take out money. Your portfolio should be focused on preserving your money in risk averse investments such as bonds, rather than the gains afforded by stocks. Access to your funds when you need them or liquidity is a vital planning tool as well because you may need them for pre-planned events such as your child’s university or wedding. Your portfolio and retirement plans are something which will evolve over time and constantly be reviewed and updated with your advisor.
Let’s not forget that just because you’re growing your money, you’ll have access to all of it when you withdraw it. Taxes can decimate your portfolio if not accounted for and inflation is the often-overlooked, under planned killer. As with all investments, a retirement portfolio involves making money or income which means, you guessed it, taxes. We won’t delve into tax rates on income, as we discussed this in depth in our previous blog, but it’s safe to say taxes must be accounted for and paid.
Inflation, most simply put is the increase in the cost of living over a period of time. It means that a dollar today will buy less than a dollar in the future and that has a massive implication on your retirement fund. In 2018, the average rate of inflation in Canada was approximately 2.3%. This may seem negligible, but over the course of 30+ years, it could cut your retirement savings worth in half. Returns on your investments must always factor this in otherwise you’ll be in trouble when the time comes to start living off your retirement fund.
Part 3 of this series to follow next week! We will wrap up the series with final thoughts on retirement planning!