It's Your Money  

Grab that $384,000

There is a simple mistake that can cost you $384,000 but is easy to avoid.

That mistake is not being aggressive enough with your investment savings.

While I often preach about being conservative and not being too greedy, there are many people that go too far in the opposite direction. A certain level of risk and aggressiveness in your investment portfolio is required to reach its full growth potential.

The stock market is no doubt volatile; the S&P 500 saw over 30 downturns of -10% or more in the past 50 years. But here’s the thing – it ultimately recovered from each and every one of them.

If you simply can’t weather the downturns and you will pull your money out during each one, then the stock market may not be for you. But if you can truly take a long-term investment view and stick to your plan, there is an awful lot of upside potential.

Let’s take a closer look. Assuming a $500/month contribution over the 30 years of your working career, how much can you expect to accumulate:

  • A conservative portfolio comprising of mostly fixed income would grow to $349,970 (four per cent per year).
  • A moderate portfolio with a mixture of stocks and bonds would reach $502,810 (six per cent per year).
  • A more aggressive portfolio invested entirely in stocks would grow to $734,075 (eight per cent per year).

If you limit yourself to that more conservative portfolio and achieve the four per cent per year average growth rate, you would be missing out on $384,105 of extra assets to use in your retirement.

Your retirement will likely cost a lot more than you think so that extra cash will be much appreciated!

The key distinction here is that I’m talking about being more aggressive, not downright greedy or foolish. The reason so many investors achieve low returns or even lose much of what they put in is that they attempt to earn even higher returns, expecting north of 10% each year.

They put money is real estate investments/scams, risky resource plays and long shot startups that have a slight chance of hitting it big.

By suggesting some of you be more aggressive, I’m not suggesting you “roll the dice” on a long shot, but instead talking about reducing your fixed income allocations a little bit and being more fully invested in a well-diversified and stable portfolio with an appropriate amount of equities.

It is easy to adopt a conservative investment strategy and resign yourself to limited growth in your investments, but that move could really end up hurting you in the long run – to the tune of $384,105.

While investing in the stock market may seem too risky for you, consider the risk of not having enough money to fund your retirement and how you will make ends meet?

Of course, each situation is different and you should work with a qualified advisor to determine what level of aggressiveness is right for you.     


Say yes to free money

A surprisingly high number of Canadians are giving up free money.

Not just a little bit of free money either, we’re talking billions of dollars per year.

These individuals are ones that are either not fully contributing or not contributing at all to their company’s defined-contribution (DC) pension plan. By not contributing, they’re passing up matching contributions from their employer.

DC pension plans (as well as group RRSP plans) are typically funded by a combination of employer and employee contributions. Most plans provide “dollar for dollar” matching up to a prescribed limit.

For example, an employer may provide an employee even matching up to $10,000 per year or eight per cent of their annual salary.

Take a second to think about the math here – if you put $10,000 into your plan each year, your employer puts an additional $10,000 in, which means you get a 100 per cent return on your investments.

Yet, there are still far too many people passing up on this benefit.

Insurance company Sun Life Financial, the largest provider of group retirement services in Canada, administers more than 7,900 group plans that cover 980,000 members.

They recently took a look at the DC pension plans they administer to see just how much money is being passed up on and estimated the total to be somewhere between $3-$4 billion a year.

If we could total up the amount of money being passed up on annually from all of the other DC plan providers nationwide, it would be a far more staggering sum.

Participation rates in group savings plans tend to be in the 60% range and 20-25% of those who do take part are not making their maximum allowable contributions.   

Many people not contributing will cite the lack of cash flow at the end of each month as their primary reason for not participating and they can’t stand the thought of any more money being deducted from their monthly paycheques.

But are they really stopping to think about the alternative? Reaching retirement age without enough money saved up is a fate that is becoming more and more common.

If you find yourself not fully participating in your own company’s DC or group RRSP plan, consider sitting down with a certified financial planner professional to re-evaluate your monthly cash flow and find a way to make it work.

Still not convinced?

Then consider your company’s contribution matching as a raise to your salary. Would you really say no to a raise?

Retire as a millionaire

Reaching that goal may sound like a far-off dream but it’s more attainable than you might think.

While not always easy, following these eight steps can go a long way to helping you make that dream a reality.

Step one: create a plan.

No matter how little or how much money you have to invest right now, a financial plan is key to reaching your goals and will be the roadmap to achieving all of the other steps outlined below.

Step two: start saving money now.

Even if it’s just $25 per month at the start, the earlier you can get the ball rolling the better.

You’ll be surprised to see that you don’t notice the money gone when it’s automatically deducted from your bank account each month and will be a lot more eager to up the monthly contribution amount once you see your investment account start to grow.

Step three: watch your spending.

Make sure to live within your means and don’t spend too much on your house, cars and vacations. Sure, your monthly salary can afford the high mortgage or car payment now but what about your savings?

Make it a top priority to put a portion of your earnings (the amount is calculated in your plan from step one above) into long term savings each paycheque.

Step four: take full advantage of any benefits and plans that can give your retirement a boost.

Use the TFSA and RRSP programs for their tax savings benefits and take full advantage of any employer matching investment opportunities.

When your employer is willing to match 100% of what you put in, there may be times when it’s appropriate to take on slightly more debt to make the full contribution amount.

Step five: increase the amount you save each month or year as you get older.

Most people will see an increase in their employment income over time and you should make sure to increase how much you put away accordingly.

Step six: create a proper asset allocation plan and stick to it.

When you’re young, your portfolio should hold mostly quality equities and you should avoid holding too many fixed income vehicles for your long-term investments.

Don’t get too worried about the short-term volatility of the stock markets as long as you have a well managed portfolio in place.

Yes, the markets will take some dips over time but taking a (moderately) aggressive stance will likely provide much greater returns in the long run.

Step seven: protect your retirement plans.

Be sure to create an “emergency fund” so that you have a few months worth of expenses set aside in case something happens.

You should also have appropriate disability and critical illness insurance in case a major injury or illness takes place as an event like this can completely derail your plans if you’re not prepared.

Step eight :be patient and not get greedy.

You will no doubt hear of many “get rich quick” opportunities over your lifespan but remember that if it was really that easy, everyone would be doing it.

Most of these schemes (scams) will only leave you further behind and many could cause you to lose everything. Stick to your retirement plan and don’t get greedy.

The key to building a million-dollar retirement portfolio is compound interest and the sooner you start putting money away, the longer it will have to compound and grow.

Nobody plans to fail, but plenty of people fail to plan.

Create your own plan today and follow the above steps to realize your dream of retiring as a millionaire.       


Kids cost you a fortune

Kids cost a lot more money than most Canadians think.

A recent study found that the average Canadian parents will shell out approximately $255,000 on each child from birth to age 18.

This amounts to about $14,000 per year, every year, for each child that you have. But wait, it gets worse.

The amount a child costs is climbing higher every year and most parents don’t cut the bank of mom and dad off after age 18 either. The financial outlay can last much longer for some.

Just to be clear, I’m not advocating that you should avoid having kids, even if they will cost you a fortune. But I will suggest that new and soon-to-be parents take the time to properly consider the costs and build them into their financial plans.

In addition, a monthly budget can help you separate the want vs need expenses and keep more money available at the end of each month to pay down debt and save for your own retirement.   

The big budget items include clothing ($1,000/year average), food ($1,800/year average) and increased household expenses ($2,000/year average). While you can’t simply stop feeding your kids or let them roam around without clothes, there is a big difference in how much you can spend or save on some of these items.

The desire of first-time parents to run out and buy countless new outfits from the store is certainly understandable, but your child may end up wearing the outfit a few times at most if at all before they outgrow it.

considerable amount of money can be saved by purchasing used children’s clothing and as an added bonus you won’t care so much when they destroy the clothes playing outside!    

As your kids grow, the monthly food budget will likely climb as well. You can’t start skipping meals but you can still take control of the food budget by purchasing in bulk where appropriate, cutting down on wasted food and reducing the amount of times that you eat out at a restaurant.

School-related costs can be surprisingly high, even for those children in a public school. But the real sticker shock comes when they head off to University.

The amount of post-secondary financial support parents provide is unique to each family and a proper financial plan can help determine what you can and can’t afford to contribute.

As selfish as it may sound, getting your own finances in order has to take priority over contributions to an RESP account.

In my opinion, having a child is the most amazing and rewarding thing that a person can experience in their lifetime. But doing so does come with extra responsibilities.

Whether you’re contemplating having kids or already have them, proper financial planning is extremely important to help ensure that you’re doing things right.

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and will take over as board chairman in June. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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