|
|
|
Retirement is for you not your money |
|
|
Keep your money working for you.
Many people think that protecting their retirement nest egg in low-risk, income-generating investments is a prudent financial move. But the fact is, maintaining a portion of your portfolio in equities that have growth potential is more likely to keep your money working for you.
Retirement is for you not your money | |
| Keep your money working for you
Many people think that protecting their retirement nest egg in low-risk, income-generating investments is a prudent financial move. But the fact is, maintaining a portion of your portfolio in equities that have growth potential is more likely to keep your money working for you.
Statistics suggest that today’s 65-year old is probably going to live another 20 to 30 years. And investing solely in safe investments may not provide the income or growth necessary to maintain your living standard for that length of time.
That’s why it’s important to keep your money growing by investing it, even when you’ve retired. It’s great to be able to stop working, but your money certainly shouldn’t.
Why “safe” isn’t always so
One of the best ways to help your savings last for the rest of your life is to keep some of your money in the equity market.
Inflation could erode the value of your retirement funds if you move all of them into conservative investments focused on income-generation. Although those investments offer greater stability than equities, they won’t help you grow your savings.
The key to living a comfortable retirement lifestyle is to properly diversify your investments so you don’t drain your nest egg.
Equity versus estate
When you started investing for retirement, your advisor probably helped you diversify your portfolio to contain a mix of stocks, bonds, mutual funds, GICs, and cash. Now that you’re retired, one of your priorities may be your estate or capital preservation.
But you should still continue to balance your investments between capital preservation (preserving the money you already have) and growth (potentially increasing the money you have).
Because you may need to start withdrawing some of your money as retirement income, definitely keep some of your savings in a safe place, such as a GIC or other income-generating investments.
But to keep ahead of inflation and not erode your savings, move a percentage into equities. The equity portion of your portfolio will help ensure that it keeps growing, not dwindling. The kind of equities you invest in will depend on your risk tolerance, investment time horizon and investment objectives.
Diversify your investments
Diversification is a crucial aspect of successful investing. To diversify means to spread your portfolio over many types of investments.
Diversification will ensure that if a portion of your portfolio is not performing optimally, there are other investments bringing in returns or paying out adequate income.
There are a variety of investments that you can choose from to appropriately diversify your portfolio while in retirement. But choosing the right investments can be a monumental task given the variety of choices out there. To achieve optimum diversification and return potential, consider an asset allocation strategy.
Asset allocation
Asset allocation focuses on dividing investments among different kinds of assets – stocks, bonds and cash – to optimize the risk/reward trade-off.
Asset allocation is commonly described as the strategy of not putting all your investing eggs in one basket. When done properly, it’s also a way to make sure your baskets are filled with only the best-quality eggs. Ongoing monitoring ensures that bad eggs are replaced when necessary, leaving you with the best possible selection at all times.
More than simple diversification, asset allocation may boost returns while lowering volatility, by blending asset classes in the proper mix. When certain asset classes are not performing well, others are. This dynamic helps ensure positive returns in your portfolio, lower risk and less volatility.
The most important part of an asset allocation program is finding the right mix of investments. A portfolio that is well balanced can offer you the potential for growth and still keep the risk in check.
Manulife, an asset allocation expert, and your financial advisor can help take the guesswork out of the balancing equation and make it easy for you to invest with confidence.
No matter what your investing profile – conservative, moderate, balanced, growth or aggressive – you can choose from a number of Manulife portfolios at every risk level. All of Manulife’s asset allocation portfolios are designed to help maximize returns and minimize exposure to volatility.
Mutual funds and segregated funds
Other types of investments to consider are mutual funds and segregated funds. Although you probably already own mutual funds, it’s important to consider what type of funds you have and if they are working for you.
Given that you’re thinking about retirement, your portfolio probably holds a lot of bond and income funds – after all, they are low risk and likely to preserve your capital. However, they might not provide the type of growth your portfolio needs. And once again, given your expected longer life span, you may outlive your money if your portfolio is not growing.
Consider, instead, investing a portion of your portfolio in balanced funds and equity funds to create a better mix, so your portfolio can grow with you.
As with all equities, though, you should only invest in them if you are prepared to be in the stock market for several years without withdrawing your capital. And even though they present less risk than stocks, a fund’s risk factor will depend on what type of holdings it has in its portfolio.
Do they make sense for me?
Mutual funds and segregated funds offer the advantages of diversification and professional management – and both reduce risk. They give you access to a variety of investments in one easyto- buy portfolio. More importantly, they can give you access to the type of equities your portfolio may need.
More on segregated funds
There’s little difference between mutual funds and segregated funds in terms of how they’re managed. However, segregated funds are an option that can provide you with access to the equity markets, and still help preserve your capital.
Segregated funds have an insurance component to them and are offered only by life insurance companies. This allows them to offer several key advantages over mutual funds:
- Initial investment guarantee – Different policies will guarantee the initial investment after 10 years at ranges from 75% to 100% less withdrawals.
- You can designate a beneficiary – In the event of your death, the proceeds can be passed on to a named beneficiary without having to go through probate. This saves on probate and estate administration fees.
- Guaranteed death benefit – Because they are considered life insurance or annuity products, the death benefit guarantee protects a specific percentage of the value of the investment upon the death of the annuitant.
- Creditor protection – Investments may be protected against seizure by creditors in case of an unexpected lawsuit or bankruptcy.
Best of both worlds – the Power of Two
We’ve established that, in retirement, not only should you be looking for protection of capital, but growth in your portfolio as well.
To fill both those needs, Manulife has an innovative portfolio strategy that can offer you guaranteed growth plus the potential for higher returns. It’s called the Power of Two.
This strategy is for those of you who have most of your investments in GICs and are not garnering the growth potential of equities. The Power of Two calculates what proportion of your assets should be put into segregated funds and what proportion should remain in GICs.
The result is a portfolio that can achieve a guaranteed rate of return plus provide you with the potential for growth.
It’s all in the balance
When most people think of retirement, they want to do more of the things they love, or try new and exciting adventures. And why not? Healthier lifestyles and medical advances are giving you many extra years in which to enjoy yourselves.
Of course, everyone’s financial retirement needs will vary. After all, the person who stays close to home and loves to cook dinner every night will need less money than the one who dines out at every opportunity.
But no matter what your lifestyle, you can’t just sock away your savings in low-risk investments, cross your fingers and hope everything turns out all right.
Choosing the right retirement investments to see you through involves balancing risk and reward. Don’t forget that your money needs to grow continuously, and you also need to keep an eye on protecting what you have.
Whether you choose asset allocation or the Power of Two, deciding on the ideal investments and monitoring your portfolio can be complicated and time consuming. If you would rather spend your time in the garden or playing with your grandchildren, a financial advisor can help determine the amount of money you can safely afford to invest for future growth.
What are the Chances?
Take a look at the table below. Chances are you’ll live longer than you thought.
 | | 75
10 more years | 85
20 more years | 95
30 more years | | Male | Age 65 | 84.5% | 56.1% | 21.9% | | Female | Age 65 | 90.7% | 69.1% | 31.7% | | Couple | Age 65 | 98.5% | 86.4% | 46.7% |
Source: Annuity 2000 basic mortality tables, projected with Scale G.
How likely are you to outlive your money?
If you don’t have an adequate equity portion in your portfolio providing growth, it’s quite possible that you’ll outlive your money. The table below shows how likely you are to outlive your money with different percentage allocations of stock (equities) and bond (income-generating) investments.
Stock/Bond Allocation | Withdrawal Rate | 5/95 | 15/85 | 40/60 | 60/40 | 80/20 | 100/0 | | 4% | 63% | 29% | 15% | 14% | 12% | 15% | | 5% | 100% | 91% | 58% | 42% | 34% | 32% | | 6% | 100% | 100% | 90% | 72% | 59% | 53% | | 7% | 100% | 100% | 99% | 93% | 82% | 76% |
Source: T. Rowe Price Associates, 2003. Monte Carlo simulations
Sources of retirement income
When most Canadians retire, their income is made up of government pensions, employer pensions, registered retirement savings and other personal assets.
However, the income you can pull from government and employer pensions is often times fixed and does not grow. With the rate of inflation and longer life spans, you could very well outlive your personal money.
Even small increases can go a long way
Did you know that even a 1% increase in your rate of return can make a difference of tens of thousands of dollars?
Say you have $100,000 of RRIF assets invested in a low-risk portfolio earning a return of 7%. If you changed your investment strategy to be slightly more aggressive with additional equities, and increased your rate of return to 8%, you would earn an extra $41,000 over 15 years.1
| 1 | Rate of return is for illustration purposes only and is not indicative of future performance. |
|
| | © Copyright of this article is held by The Manufacturers Life Insurance Company (Manulife Financial). You are free to make copies of this article and to distribute it, either in paper form or electronically, as long as you do not change or remove any part of this work. All other uses are prohibited. Manulife Investments is the brand name identifying the personal wealth management lines of business offered by Manulife Financial and its subsidiaries in Canada. As one of Canada’s largest integrated financial services providers, Manulife Investments offers a variety of products and services including segregated funds, mutual funds, principal protected notes, annuities and guaranteed interest contracts. WealthStyles, Manulife and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Financial Corporation. |
|
|
