It’s a new year and a new adventurous year is ahead for all of us. This might be the year you purchase a new house, a new car, take that dream vacation, welcome your first child, or take the plunge into entrepreneurship. There are countless opportunities, many roads to travel and so many memories to make. To make the most of the year and the goals you want to achieve, you should take note of what will need to be done, track your progress and adjust course if things change – in other words, have a plan and stick to it.

A budget is simply putting together a plan and being committed enough to stick with it, making adjustments as needed, to reach your end goal. Budgeting has gotten a bad rap over the years, with people assuming that you have lived a restricted lifestyle to save any cash. A budget helps you prioritize your wants and needs, focusing your spending habits on achieving the lifestyle you want without the burden of unnecessary debt.

Creating a budget is as simple as tracking your expenses, determining where you want to spend your money and adjust your spending accordingly. This does not need to be complicated – a simple spreadsheet will do.

Step 1: Identify your average monthly expenses:

Record your monthly income and your fixed expenses per month. Fixed expenses can include items like your mortgage or rent, utility costs (such as water, electricity, heating bills), car loans, monthly insurance premiums, car loans, phone/cable/internet plans, etc. These are all items that you pay each month and are fixed, meaning the amounts rarely change.

Next, record your variable expenses, such as entertainment, restaurants and take-out, groceries, gas, liqueur, your morning coffee, etc. These are the items that can change month to month.

Lastly, record any savings and/or debt repayments, such as any contributions to other accounts, such as RRSPs, TFSAs, OSAP repayment, average credit card debt, personal loans, etc.

Step 2: Identify whether you break even, have a surplus or a deficit and adjust your spending or saving as necessary:

Add all of your expenses, savings and debt repayment values together. Subtract that value from your monthly income; this may result in a break-even, a surplus or a deficit. If you have a surplus, determine where to channel that money, such as savings or debt repayment.

If you have a deficit, take a look at your variable expenses and prioritize them to see where you can save money. This might mean cutting the cable or eating out only once a month instead of every week. If you really want to live within your means with the budget you create, then you will find a way to make the necessary adjustments, even if it means a lifestyle change.

Take your time to create your personal budget and ensure it is the right fit for yourself. Don’t run into this and make quick decisions that you may not stick to. Make it a priority to track your spending and make plans to ensure your success for the new year.

Upon entering the workforce, one of the first things you are informed about is the amazing group RRSP or pension plan that your company has. If you put X dollars away each month, the company will match it, or you can receive a set pension for life.  Everyone looks at this as an amazing deal. You can get a 100% return on your investment or money for life in retirement. Why would you not take it? What they don’t tell you is that the group RRSP really has no guarantees and the company owns the policy.

My Experience

When I entered the workforce after university, I too took advantage of the amazing group plan. I put the maximum amount away, received the company match, and invested everything to start saving for my retirement. I thought this was guaranteed money and things could not get any better. However, after 3 years of working for this company, they changed their group plan without notice. The company match was lowered and the number of investment funds was decreased, which resulted in those amazing returns that I thought would continue long into the future to drop drastically. This is when I learned that I had to take my retirement plans into my own hands.

Real Life

The downfall of Sears Canada has recently brought this issue to light, with pension plans being frozen for many retirees as the company has fallen into financial disrepair. Now, with Sears Canada closing all of their remaining stores for liquidation, the pension plans are in limbo. Pensioners are not considered primary lenders and therefore, there is no obligation for Sears Canada to pay out any pension to them. All of the current pensioners and employees could lose all of their retirement savings and pension plans. All of their hard work and savings are now gone due to the company’s inability to succeed.

Group plans can be an amazing feature with company matches and can help you invest for your retirement. However, they should not be the primary or sole source of income for your retirement. Utilize personal RRSPs and TFSA to take personal responsibility and control over your money. Be smart with your money and have all of the angles covered to ensure your future is successful.

Throughout your career,  you have been investing your money on a regular basis into your retirement savings plan (RRSP), and think you have saved enough income to last your entire retirement. If you have planned properly, your RRSP, group plan, old age security (OAS), and Canadian Pension Plan (CPP) should meet your personal income requirements. Yet, there are many factors that can erode your retirement income faster than expected. 

What risks

Market risk can have a large impact on your RRSP or Retirement Income Fund (RIF). Poor performing stock market returns can impact your savings, amounts regardless of long-term rates of return. For example, losses in the first few years of retirement will have a larger impact on your retirement income than losses later on. 

Inflation risk will erode away your purchasing power as time goes on. This is a major concern for anyone on a fixed income, as a period of high inflation can be devastating. Relying on guaranteed income certificates (GIC) alone will not keep up with inflation with interest rates as low as they are now. A balanced portfolio with GIC’s as well as fixed-income funds is important to keep up with inflation at the least.

Longevity risk or outliving your money is a growing concern for many people. As life expectancy continues to increase, retirement income will need to last longer and longer. This means that planning for retirement needs to go beyond the typical life expectancy timeline; otherwise, there is a high chance your income will run out by age 90.

Withdrawal rate risk and spending too much income can limit your lifestyle later in life. Striking that perfect balance between over limiting your income and overspending is a delicate act. 

Investment behaviour risk related to making quick decisions emotionally can derail any retirement plan. Emotions play a large part when talking about finances; fear or greed can each have impacts on your savings and the end goal.

Final thoughts

These are just some of the risks that need to be addressed with building a financial plan for retirement. Working with a financial advisor can help find the correct investment strategy, support you through the financial roller coaster ride, and work to ensure your money can last. Book an appointment with us to review your current retirement plan, or help build one for you. 

The stock market is similar to the weather in that both are increasingly prone to widening extremes. Investors should be reminded that stock market corrections are a fact of investment life. Historically, it is not uncommon to experience the stock markets pulling back 10 to 15 percent from previous highs.

What causes corrections

Warren Buffet contends that successful investing doesn’t require extraordinary intelligence, but rather an extraordinary discipline. It helps to understand that stock market corrections are part of a never-ending adjustment between a number of variables. These variables include interest rates and earnings, GDP growth, underlying economic patterns, currency shifts, world trade agreements and political relationships between world powers. Investors who switch their holdings into GIC’s when markets are down are locking in their investment and will be unable to respond to an upward shift.

What to do

Buying high and selling low is one of the most common mistakes investors make. Markets can and will over-react at times. Investors need to diversify to better protect their portfolios against market fluctuations. A balanced portfolio with a combination of asset classes- GIC’S, fixed income, real estate funds, Canadian equity and foreign equity provides a cushion to market volatility. Invest in evenly balanced packages in the equity of great ranking Canadian and foreign corporations. Stick to a personalized and well-structured investment strategy that matches your financial needs, goals, cash flow and long term objectives.

Investing without emotion is easier said than done. There are some important considerations that can keep an individual investor from overselling in a panic. Understand your own risk tolerance and understand the element of risk in the investments. Data shows that an investing strategy and staying the course often results in the best performance returns. Do not get caught up in media hype or fear and buy or sell investments at the peaks and valleys of the cycle. Stay the course and seek advice from a financial advisor before making any decisions regarding your investments.

Trade wars, Brexit, NAFTA – all of these bring volatility and the fear of losing money to mind.

A client recently emailed me the following. “I’m becoming increasingly concerned about the volatility in the stock market. Would it benefit us to move to a money market fund in the short term in order to wait out the crazy market?”

Understand what your risks are

Depending on your portfolio, the fear of volatility may not equal the market risk based on the probability of capital loss. If you are saving for a short term goal, then investing in the stock market increases your risk. Whereas, investing for the long term, such as retirement, is less exposure to market volatility if you are properly diversified. 

Many investors believe that pulling money out of stocks and into safe money market or cash is the safe move. Wrong. Derailing a long term plan by timing the market is one of the riskiest moves an investor can make.

Know the facts

A recent study done by J.P Morgan analyzed the S&P 500 index over a 20 year period, ending on December 31, 2018. If you had invested $10,000 at the beginning and stayed fully invested, the account would have grown to $29,845, or 5.62% annualized performance. Missing 10 of the best days over the same time period, the overall return is cut in half. If you missed 40 of the best days, the investment would have a return of -4.2%. With 5,000 trading days, less than 1% of the time is responsible for the change in returns. 

What should you do?

Over those 20 years, there was the tech bubble (2000’s), the financial crisis (2008) and the worst December returns in 2018. The markets have experienced a correction on average once every two years, yet people are always in fear of ‘the next one.’ You increase your odds of investment success and decrease your risk by staying invested, re-balancing periodically and avoiding distractions. Do not get distracted by the latest trade price or make emotional decisions on a fear of what could be. Talk to me to review your investments and make sure they are in line with your financial goals.