The Home stretch: Preparing for retirement
Retirement is so close you're actually making plans to travel, pursue hobbies and spend more time with your grandchildren. You've worked hard, invested regularly, and are getting ready to enjoy life outside of the daily workplace grind.
For many, this is the investing phase when you want to take extra steps to safeguard your retirement savings. You're still investing, but your portfolio may be less aggressive than it was when you were younger. As life expectancy grows, you also need to try to ensure that you don't outlive your money.
Below are some investing considerations for people getting ready for retirement.
Make the money last: Men who are 65 today will live to 84 on average, while women of the same age will live to 87, according to Canada's Chief Actuary.1 That means most retirees will need their investments to last 20 years or more. The strategy is to save enough to help you live a comfortable retirement and potentially leave a legacy for your estate. The cost of living can also vary depending on which stage of retirement you're in. Some experts say retirement is more expensive in both its earliest and latest years, and less expensive in the middle. It's more costly in early-on because you're spending extra money on travel and hobbies (think cycling trips and yoga retreats). Your activity is likely to slow down in your 70s and 80s, which means you'll spend less. The cost of living can rise again in old age due to health considerations, which usually means spending more on health care, potentially including a long-term care facility. Take steps to ensure your portfolio continues to grow as you age, which will help to cover the costs in each stage of retirement.
Change your asset mix: Most experts suggest pre-retirees reduce their exposure to equities. The goal is to have less exposure to stock market volatility, especially with money you may need in the next few years. Experts are mixed in their views on what the right mix should be, but a typical recommendation is an allocation of about 50 per cent stocks and 50 per cent fixed-income, such as bonds. In today's low interest rate environment, many investors, even in their 60s and 70s, continue to be more heavily weighted in stocks. The decision comes down to each investor's personal risk tolerance. In general, the emphasis should be on protecting your savings, while managing your portfolio against inflation and longevity risks.
Keep investing: Retirement is close, but that doesn't mean you should stop putting away money for your future. In fact, now may be the best time to maximize your retirement savings and take advantage of opportunities. It's never a good idea to try to time the market, but investors who have built up larger portfolios can make strategic decisions on where to put their money through individual stocks and bonds or by investing in exchange-traded funds and/or mutual funds. Just as you would in your younger years, be sure to have a diversified portfolio to protect against market volatility. The key is to stay invested and continue to grow your retirement nest egg.
1Globe and Mail. « Why it's time to stop planning your 100th birthday party » (April 2014)