Investors have almost always searched for low-risk, high-return investment strategies that allow them to retire comfortably. However, there is a risk-return tradeoff in all investment strategies and there is no one-size-fits-all approach to retirement planning. Developing a strategy for retirement takes an understanding of diversification, your long-term goals and how you will pay for retirement.
Investors often have a tendency to invest in companies and securities with which they are most familiar. To some, this might make sense. After all, why put your hard-earned money in an area of the market you don’t understand? The problem with this philosophy is you may be limiting your investment opportunities and your options may be too restrictive. For example, domestic markets only make up a fraction of global stocks and you could be taking on unnecessary risk by limiting your investments to your home country.
Failing to diversify outside of country lines can mean taking on additional political risk—the risk of an investments returns could react as a result of political changes—and country risk (the risk that a country underperforms ). In addition to taking on unnecessary risk, you could be missing out on additional growth opportunities around the world. Three of the largest countries within the MSCI World Index—the United States, United Kingdom and Japan—make up around 76% of all world stocks.[i]
Before you develop any kind of investment strategy, you must first define and understand your long-term financial goals. Some of the most common financial objectives include:
Once you have an understanding of your investment goals, you can start to think about how you plan to generate income in retirement.
We believe the first step of determining how you will pay for retirement is by calculating all of your non-investment income sources. The most common sources of non-investment income we come across include:
We believe asset allocation is the single largest factor in generating a portfolio's return. Asset allocation is your portfolios mix of stocks, bonds, cash and other securities. Some investors’ instincts tell them to play it safe when they hear that asset allocation is the most important part of their retirement strategy. However, this mindset could mean running out of money faster than you planned.
If you are looking to combat the impact of inflation and reduce the impact of your withdrawals, you may need to maintain equity exposure in your RRSP—or any other retirement account you have.
A common retirement misconception that we come across is that it is safe to withdraw 10% annually from their portfolio based on stocks 10% annual returns dating back to 1926.[ii] To lower the risk of running out of money in retirement, you may be better off limiting withdrawals to 5% annually (which may differ based on your personal situation and needs) from their RRSP or any other retirement account.
Determining which retirement strategy will best suit your retirement income needs is not an easy task. Luckily, Canadians have a number of tax-friendly investment tools that can help them save. The closer you get towards retirement, the more important it is to make sure that you get it right. If you would like help in planning the next stage of your life, Fisher Investments Canada can help. Contact us or download one of our guides to learn more.
[i] Source: FactSet, as of 29/04/2019. The MSCI World Index measures the performance of selected stocks in 23 developed countries. Values may not sum to 100% due to rounding.
[ii] Source: FactSet, as of 18/1/2019. Based on 9.9% annualized S&P 500 Index total returns from 1926 – 2018.