Saturday, August 18, 2012

The power of "a penny saved"

Modern portfolio theory—the concepts that underlie most financial thinking today—would argue that an aggressive allocation to stocks should generate higher returns over time than a comparable holding of lower-risk assets such as bonds. The flip side, of course, is greater risk of loss.

During "the lost decade" of 2000–2009, which left the broad U.S. stock market under water, that risk came home to roost. The lesson was especially hard on investors closer to retirement who had a significant allocation to equities and were counting on "average" returns from stocks to reach their goals.
A recent Vanguard study points out that some of the most reliable and powerful levers in your retirement toolkit have less to do with modern portfolio theory than with Benjamin Franklin. The study, Penny saved, penny earned, illustrates that investors who increase risk with the objective of gaining higher returns might actually be less likely to meet their retirement goals than those who simply save more, whether by starting earlier or by saving at a higher rate.
Maria Bruno, a Vanguard investment analyst who coauthored the study, noted, "The markets over the past few years have been a reality check for investors. In saving for retirement, it's better to focus on the things you can control—when you start to save and how much you save—because that's going to be the most reliable way to succeed in meeting your goals."
Save sooner, save more
As the study shows, saving earlier and saving more are things you can control. Independently or together, they are more likely to help you reach your retirement goals than adding riskier assets in the hope of getting higher returns.
While investors nearing retirement and facing a shortfall might be tempted to move more aggressively into stocks to try to catch up, a less risky option would be to keep working and keep saving. If you delay retirement by even a few years, the extra savings coupled with not spending from the portfolio can make a material difference in helping to fill the gap.
Looking at what you can control
The study used the Vanguard Capital Markets Model® (VCMM) to simulate investment returns using various assumptions about salaries, asset allocations, and contributions. One data set from the study shows a hypothetical 35-year-old investor planning to retire at age 65 who puts 12% of an annual salary into a retirement portfolio with a moderate asset allocation (50% stocks and 50% bonds). After 10,000 simulations based on different potential market scenarios, the investor's median inflation-adjusted balance at retirement was $475,000.
The study then examined the impact that each of three investment levers—portfolio risk, savings time horizon, and savings rate—could have on the investor's portfolio balance at retirement.
Behind door number 1—a 22% increase
Asset allocation—the portfolio's balance of riskier and safer assets—has been proven by a number of studies to be a powerful driver of portfolio performance over time. Choosing a more aggressive asset allocation (80% stocks and 20% bonds) would increase the investor's median balance at retirement by 22%. It's worth noting, however, that with this allocation the "worst-case" outcome is a much lower balance at retirement than the 50%/50% portfolio produced in its own worst case.
Door number 2—a 25% increase
Adding more savings to the portfolio—in this case, contributing 15% of an annual salary rather than 12%—would result in a median balance 25% higher than the initial one, according to the VCMM simulations.
And door number 3—a 51% increase
As Ben Franklin would have guessed, the power of compounding has the potential to be the most effective strategy. By starting to save ten years sooner, even with the 50%/50% allocation and the 12% saving rate, our investor would have garnered 51% more, with a median balance of almost $720,000 at retirement.

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Saturday, August 11, 2012

Young people not preparing for retirement

Young Canadians aren't as well-prepared for retirement as their optimism would suggest, according to a Bank of Montreal survey.
One-third of people under 35 expect to retire by the time they're 60, but are the least prepared for when the day comes, the study finds.
The disparity between goals and reality mostly comes down to attitude. The study suggests that a person may need to be more excited about the prospects of retiring in order to start the planning stages.
"While it's great news that young adults appreciate the importance of retirement planning, it's a concern that many are not backing it up with concrete action," said Tina Di Vito, Head of the BMO Retirement Institute, said in a statement. "A clear dichotomy exists between what young people think about retirement and what they are actually doing to prepare for it."
Some 82 percent of young adults surveyed believe retirement planning is important, with another 52 percent owning a Registered Retirement Savings Plan (RRSP); and 36 percent have a Tax Free Savings Account (TFSA), the survey found.
While gender variables are present, the difference between men and women in the same tax bracket is negligible. The research indicates that the key indicator is the time remaining before retirement, not the actual age of the individual.
Having role models is critical when helping young people think differently about their financial future, Di Vito says.
"Parents and other influential adults have to foster an environment that will encourage young people to think about their financial future," she says. "Despite the challenging and complex financial realities facing young people today, increasing their financial preparedness for retirement will guide them towards positive results."
She offers three tips to help parents motivate their children to save for their future:
  1. Start early -- encourage kids to think about saving and their financial goals as early as their tween or pretween years.
  2. Hold them accountable - If adult children are employed but still living at home, encourage them to pay rent or contribute towards the household expenses.
  3. Speak their language - Instead of 'retirement planning' talk about 'saving money for tomorrow.' Even think of using smartphones or social media to communicate the message.
But such negative factors as high student debt, unemployment and low wages could hinder a young person's ability to save enough for retirement, the study also found.
The survey polled 1,000 Canadians in February and was conducted by Leger Marketing.

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Thursday, August 9, 2012

Top tips Canadian retirees wish they knew before they retired

Savings and health are key to making retirement dreams a reality

Canadian retirees are feeling good about their lives, but many still have financial concerns, finds the TD Waterhouse Canadians and Retirement Report, a national survey of retired people. The majority of retirees polled aren’t confident they saved enough for retirement and have some advice for those next in line: start earlier and save more.
The top pieces of financial advice Canadian retirees wish they were told before retiring is: save more money than you think you will need (58%), pay off all debts before stopping working (28%), work with a financial professional (25%), and don’t leave the workforce too early (20%).

It takes a lot more than just money to live your retirement dream, but without enough savings, it’s almost impossible to enjoy a comfortable and fulfilling retirement lifestyle. 
The good news is that 48% of Canadians say that their retirement is “mostly” what they were expecting, and 11% say it’s “exactly” what they had in mind, so the majority are living their retirement dream.  Getting all the little financial planning steps right will make the difference between ‘mostly’ and ‘exactly’ living the retirement of your dreams.  Your retirement is as unique as you.  Develop a personalized financial plan that is driven by your lifestyle and then get ready to enjoy your retirement journey.

With 37% of Canadian retirees concerned they don’t have enough money to do what they want, and 23% worried about outliving their savings, it’s clear that planning and saving is needed in order to secure your financial future and live the retirement lifestyle you have in mind.  The following tips can help you get your savings on track, regardless of your stage in life or financial situation:
Twenty years from retiring? Retirement may seem like a distant reality, but it’s important to start planning now.  You don’t need to be debt free to start saving for retirement: if you contribute to your RSP and then apply any tax refund you receive from making the contribution towards paying down debt, you’ll likely be better off in the long term.

Ten years from retiring?  The closer you get to retirement, the more important it is to take stock of your savings plan.  Work with a financial advisor to monitor your progress and take corrective action if you fall off course.  Consider your investment objectives, the time remaining to retirement and your risk tolerance, and map out an investment strategy that will let you optimize the returns on your RRSP savings.  
Five years or less from retiring?  You’re almost there!  Before you retire, allow ample time to plan what you want to do with the money you’ve accumulated in your RRSP. When it’s time to convert your RRSP, you might want to consider a RRIF or an annuity.  If you have more than one RRSP or RRIF, consider consolidating for ease and convenience.  Having all your investments with one institution may also reduce your overall account administration fees.

It’s not just about money: retired Canadians share advice for those next in line: 
Almost three quarters (72%) of respondents urged boomers to take care of their health.  They also suggested it’s a good idea to take time to understand what you want out of retirement (67%) and pay off debts (63%).
For help with planning for a secure retirement e-mail us or visit