Archive for the ‘Retirement’ Category

5 Steps To Create Your Investment Portfolio

By: Kristina | Date posted: February 21, 2011 (2:59 am)

A part of saving is having a savings strategy, this means that we need to create an investment portfolio.  As young adults we need to start saving for our future goals such as buying a home and saving for retirement; and we need to create an investment portfolio that is designed for each individual goal.  The investment portfolio for a long term goal such as our retirement in 35 years will be a lot different than the investment portfolio for a short term goal such as buying a house in 5 years.

Here are the 5 Steps to help create your first investment portfolio:

Set Your Goal.  Having a defined goal will help determine what types of investments you need to create your investment portfolio.  Short term investment portfolios will have lower risk investments such as fixed income mutual funds, bonds, and GICs.  Long term investment portfolios will have higher risk investments such as Stocks and Exchange Traded Funds.

Determine Your Level of Risk.  When you create your investment portfolio you will need to know how comfortable you are with fluctuations in the value of your portfolio.  High risk investments could bring large profits over the long term; however they could also bring losses to your investment portfolio in the short term.  You must ask yourself…am I willing to lose some of my money in the short term to potentially gain profits in the long term?

Find Out What Type of Investor You Are.  Before you buy investments to create your investment portfolio you will need to determine your investment priority.  This can be done by answering a few simple questions commonly known as your Investor Profile or the Know Your Client (KYC) questionnaire. If your investment priority is capital security and not capital growth then you may be a conservative investor.  However, if your investment priority is capital growth over the long term then you may be an aggressive growth investor.  Keep in mind that you can’t have a lot of potential growth with capital security; you can only pick one as your investment priority.

Diversify Your Investment Portfolio.  We should never put all of our eggs into one basket.  Therefore, it is a good investment strategy to have a variety of investment options when we create our investment portfolio.  Diversifying your investment portfolio means investing in different asset classes such as cash investments, fixed income, foreign income, local equity, foreign equity, as well as different sectors investments.  In general an investment portfolio of under $10,000 should have 3 different investment options (such as Mutual Funds), and an investment portfolio of $25,000 should have 4-5 different investment options. If you’re a Canadian resident, you’re going to want to look into Canadian dividend stocks.

Do Your Research.  Before you buy investments and create your investment portfolio please research the investments that you want to buy.  When you are looking at information on investments please remember that past performance is not an indication of the future.

It’s Time To Start Investing

By: Kristina | Date posted: February 15, 2011 (3:57 am)

As young adults we should start to invest as soon as possible because investing for our future can only benefit us.  It is important to start investing early because starting to invest now when we are young will ensure that we have some financial stability in the future.

It is important to Start Investing for Our Future

Investing for our future can include various goals such as buying our first car, buying a home, as well as saving for our retirement.  There are several different investment options available to investors for their different short term and long term goals.  Different investment options include Stocks, Mutual Funds, GICs, and Exchange Traded Funds. These different investment options can be purchased in both Registered Investment Accounts for our retirement, as well as Non Registered Investment Accounts for other goals such as saving for a car or other major purchases.

It is important to start investing now for our future because a little contribution every month can really add up to a large investment amount later on down the road.  Starting to invest even $50 per month now can add up to a lot of money over time, when we consider all contributions as well as compounded interest and growth on our investment. 

Investing For Our Future Can Really Pay Off

There are several different financial calculators available to Young Investors to show us the benefits of starting to invest now for our future.  RBC Royal Bank offers Retirement Calculators such as a Pre Authorized Contribution Calculator, a Compound Interest Calculator, a Future Value Calculator, as well as a Retirement Cash Flow Calculator.

The Pre Authorized Contribution (RSP-Matic) Calculator is a great example of how contributing a little bit now can be a good investment for our future.  If we use the example of a young investor who starts to contribute $50 per month for their future at 23 years old, they will have a total retirement investment of $104, 827 when they are ready to retire at 60 years old.  This example uses an average annual rate of return of 7%.

The Compound Interest Calculator shows us how our lump sum contribution can grow into a future retirement savings account.  If we use the same example of a 23 year old who invests $5000 at an annual rate of return of 7%, our $5000 will be worth $61,118 in 37 years when we are ready to retire at 60 years old.

Regardless of whether we invest a lump sum contribution or we choose to contribute regularly into our investments on a biweekly or monthly basis the future benefits of starting to invest are priceless.  It is important to start saving now for our future financial stability.

Photo by MJTR

Saving for Retirement is Like Eating Chocolate

By: Kristina | Date posted: January 31, 2011 (3:27 am)

As young adults we have to start saving for our retirement.  We definitely don`t want to still be working at 70 because we have to.  I know that if I am still working at 70 years old, I hope it is by choice. 

It is important to start saving for retirement when we are young.  I like to compare my personal finances to other parts of my life, and I think that saving for retirement is like eating chocolate.  I enjoy personal finance, as both a personal interest as well as my professional career.  I enjoy eating chocolate both during my personal and professional time.  I deal with personal finance on a daily basis, and I also eat chocolate on a daily basis.

Here are some other ways that saving for retirement is like eating chocolate:

We need to have a little piece at a time. It is important to start investing early, and start investing young.  This allows us to save a little bit over a long period of time. The exact same philosophy is true for eating chocolate.  We don`t want to eat too much at one time. We can eat a little piece of chocolate at lunch and a little piece at dinner; in the end it all adds up to a whole chocolate bar. Saving $50 or $100 for our retirement on a monthly basis will add up to a large amount of money over the long term.

It is something that we should always want. I am not going to lie, I totally love chocolate.  The same is true for my retirement. I can honestly say that I totally want to retire financially stable.  In order to do this I have to save for retirement constantly over the next 25 years if I want to retire at 55.   It is safe to say that my love of chocolate will not fade over the next 25 working years of my life.  I will still be eating chocolate when I retire (hopefully) in 25 years.

Don’t indulge too much. Too much of something, even if it is a good thing, is never a smart idea. I would personally say that I can never eat enough chocolate, but I am sure that my Family Doctor, my Nutritionist, and my Personal Trainer would disagree.  As a Financial Planner I give the same advice to my clients about their investment options.  It is very important to diversify our retirement portfolio.  As we invest for the long term, we can choose different investment options to diversify our retirement portfolio. We don`t want to have only one type of investment for our retirement savings because if that investment crashes we can lose all of our retirement savings.

Stick with your favourites.  This saying is as old as I am (30 years). If it works don’t fix it. If you love chocolate don’t eat something else, if you are craving chocolate don`t eat an apple. If the way we are saving for our retirement is working for us we shouldn`t want to change it.  It doesn`t matter how we save, as long as we are saving for our retirement.  I choose to save through my employer via direct payroll deductions.  This method works for me and I love it. I don`t love it as much as I love chocolate, but I still love saving for my retirement.

Photo By The All New Adventures

A Defined Contribution is Better for Us

By: Kristina | Date posted: November 01, 2010 (1:25 am)

If we are in our 20s and 30s then a Defined Contribution Pension Plan may be a better option for us than a Defined Benefit Pension Plan.

As we graduate from college and enter the workforce we will need to choose our employee benefits which may include health and medical coverage, life insurance, and our pension plan options.  As employees, we usually have 2 options to choose from when deciding on a Retirement Savings Plan.

A Defined Contribution Pension Plan is an option that allows us to contribute a fixed percentage of our annual salary through payroll deductions.  With a Defined Contribution Pension Plan the employee retains total control over the investment options as well as the contribution amount.  Our employee contributions are defined by a fixed percentage rate and are usually matched by our Employer.

The contributions are known with a Defined Contribution Pension Plan, but the amount at retirement is unknown.  Employees contribute a fixed contribution amount, and we choose and manage our investment options over the years.  We have the option to invest in stock, mutual funds, or low risk term deposits. 

The total amount, including both Employee and Employer contributions, belongs to the employee; we are able to take it with us if we leave our employer.  This is a major reason why I feel the Defined Contribution is a better option for our Retirement Savings Plan if we are in our 20s and 30s.  I once read that the average young professional under 30 changes jobs every 5 years.  As we grow our careers and move from employer to employer, our money will move with us.

A Defined Benefit Pension Plan is the exact opposite of a Defined Contribution Pension Plan.  With a Defined Benefit Pension Plan the primary contributions come from the Employer and Employee contributions are optional.  Our Employer contributes to our pension plan on our behalf and therefore the Employer retains total control over the investment options, as well as the management of the account.

We often do not know the exact formula of employer contributions into our defined benefit Pension Plan and we also do not know the exact investments, although they are usually very low risk term deposits, bonds, or preferred shares in the company.  This information is unknown, but it is also not relevant.  The monetary benefit at retirement is guaranteed and therefore everything up to our retirement date is irrelevant. 

The formula for a full Defined Benefit Pension Plan benefit is usually a magic number that consists of our age at retirement, plus our number of years of service with one employer.  As a Financial Planner who specializes in investment and retirement planning, I often see the magic number as 85.  This means that in order for an employee to obtain full benefits (i.e. $3000 per month) their age plus the number of years of service must equal 85.  As an example if James is 55 and he has been working for the same employer for 30 years, he is eligible to retire with a full Pension benefit.

The Defined Benefit Pension Plan is not an admirable option for young professionals because we are unlikely to finish our careers with the same employer as we started them with.  I, for one, enjoy having control of my own retirement accounts and choosing my own investment options.

(Photo By Michelena )

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Retirement Planning When You are in your 20s

By: Mike | Date posted: October 04, 2010 (5:00 am)

When you are in your 20s (and for some people it is the same reasoning in their 30s), you don’t necessarily think about retirement planning. In fact, you are more concerned about finishing school, getting a good job, making money, paying off your debts, getting married, buying a house, having kids, etc. You may think that retirement planning is for old people, that you don’t need to think about retirement and that you will surely end-up with a pension plan or that you will manage it when retirement time comes around. However, we should all consider retirement planning as soon as possible. Ideally, your retirement plan should start as early as you when you land your first job… while still in school.

The power of compound interest; the very first reason to start a retirement plan today!

It is true that you don’t know when you are going to retire, or how much income you will need. But one thing is for sure; don’t count on the government or on a big fat pension plan to make your retirement comfortable; this ain’t going to happen! So if you have to put money aside in order to retire richer and happier, you should start as soon as possible. You don’t think that $25/month would make a difference? Here how it goes: $25/month at 6% gives:

4 096.98 $ 10 years
7 270.47 $ 15 years
11 551.02 $ 20 years
17 324.85 $ 25 years
25 112.88 $ 30 years
35 617.76 $ 35 years
49 787.27 $ 40 years
68 899.82 $ 45 years

And the math doubles when you do  $50/month:

8 193.97 $ 10 years
14 540.94 $ 15 years
23 102.04 $ 20 years
34 649.70 $ 25 years
50 225.75 $ 30 years
71 235.51 $ 35 years
99 574.54 $ 40 years
137 799.63 $ 45 years

As you can see, this is very profitable to start at a young age since you can get used to dropping $50 per month in your investment account at the age of 20 and get to a nice 137K in your pocket when retirement hits at 65. If you increase your systematic investment each time you get a raise, you will end-up with half a million in investments just with the power of compound interest.

You don’t need a complete retirement plan; just a line of direction

If you are in your 20s or 30s, it is true that you will go through different life events that will change your financial situation. These are the 2 decades where you will go through the most important financial steps of your life. You may change careers, move outside the country or get married. However, this won’t change the fact that you need money at retirement.

This is why establishing a line of direction (through an investment plan, asset allocation and systematic investments) will insure a comfortable retirement whenever you decide that waking up at 5am is too early for you ;-) . The base of your retirement plan will follow you through your life and only serves to push your net worth higher in the meantime.

So when should you start thinking about retirement? Do Not Wait and do it right now Giveaway

This article was to introduce our new site about retirement planning; DoNotWait.com. Do Not Wait! will be concentrated on  questions you may have about retirement and how to get there. For its launch, we are giving away more than $1,000 in prize! Here are a few examples:

- iPad from Apple

- Cash prizes

- Books

- Dvds

- Gift cards at Amazon

How to enter the giveaway?

All the rules are explained in the DoNotWait! and Do it Now Giveaway. The contest starts October 4th and ends for Halloween at October 31st.

Are You Still Contributing to Your IRA?

By: Green Panda | Date posted: July 28, 2010 (5:00 am)

I’m amazed at how quickly this year has gone by. The heatwave reminds me it’s summer, but I can’t believe we’re in the last week of July.

I’m a bit late, but I usually like to check my IRA asset allocation and see if I need to make any adjustments to contributions. I made a few tweaks, but I’m pretty much keeping to my plan.

Asset allocation has a big impact on your account’s performance. You basically determine your assets allocation on factors, such as:

  • Time -How long will it be before you retire and start withdrawing? The longer you have, the more risk you can take.
  • Risk Tolerance – Some people are naturally more conservative than others. If the recent ups and downs have you wondered, then you may not want to put all you money in emerging markets for example.

Not Too Late to Contribute

Don’t get discouraged if you haven’t opened an account up. It’s still not too late to contribute. You have until you file taxes to make your contributions. If you file your taxes mid February 2011, you can make contributions that count for 2010 until mid February.

How much can you contribute to your IRA?

Right now you can contribute $5,000/year to a Roth IRA if your modified AGI is :

  • $167,000 for married filing jointly or qualifying widow(er),
  • $116,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
  • $10,000 for married filing separately and you lived with your spouse at any time during the year.

Source: IRS Publication 590

Curious to Learn More?

Mike has some great posts here on getting the right asset allocation for you.

Don’t be afraid to ask others about what they’re asset allocation is and how they chose it. While there are some principals people should follow with how they design their portfolio, there is a lot of leeway based on individuals risk tolerance.

If you don’t have the time or interest in adjusting and balancing your portfolio, you may want to check out a target retirement fund. It is supposed to adjust as the years pass and it will become more conservative the closer you get towards retirement.

How are your retirement accounts doing? What’s your current allocation for your investment account? Are you going to change them?

My IRA’s Asset Allocation (March ’10 Update)

By: Green Panda | Date posted: March 31, 2010 (8:00 am)

The first quarter of 2010 is finishing up and it’s about time to check up on my Roth IRA. I don’t like to check constantly as I’m investing for the long term and I don’t want to get caught up in the weekly hype of what to buy and what to sell.

What exactly is asset allocation and why is it important?

In short, your asset allocation is your plan for your investment contributions. How are you going to invest? Are you going to put it in stocks, mutual funds, bonds, ETFs, etc? While that may seem like a simple decision to make, it carries risks and rewards.

Historically, while stocks tend to perform well in the long run, it’s volatile in the short term. Bonds offer less risk in volatility but you also tend to get a smaller return. It’s a trade off you have to weigh for yourself and budget accordingly. Having the proper asset allocation means adjusting your allocation to fit your goal of either aggressive growth in the long term, stability of your money in the short term (for people retiring soon), or somewhere in between.

If you’re retiring in a few years, you want to be be conservative and not have most of your investments in stock. Your focus is probably going to be on stability as you’re planning on living off of it for a couple of decades. I have decades before I retire, so I’m focusing on more aggressive mutual funds.

My Roth IRA’s Asset Allocation

I currently have my Roth IRA at Sharebuilder and it’s been pretty cheap to keep it there. However, there are plenty of options if you’re looking for a place to open up an IRA:

  • E-Trade (Annual fee and minimum are waived when you sign up for electronic statements)
  • Vanguard (Some funds require $3,000 minimum)
  • T. Rowe Price
  • Charles Schwab ($1,000 minimum is waived if you direct deposit $100/month)

Right now, here’s what the asset allocation is:

I have a decent amount in cash because I want to buy into a Vanguard mutual fund, but they have a large minimum to purchase. I’ll probably pick it up next month.

Ask Reader’s Thoughts

How are your retirement accounts doing? What’s your current allocation for your investment account? Are you going to change them?

If you haven’t gotten started, now is a great time to start. The sooner you start saving for retirement, the better compound interest will treat you when you retire.

How My Retirement is Currently Doing? (June 09 Update)

By: Green Panda | Date posted: June 11, 2009 (8:38 pm)

My Retirement Account Update 

It’s been a while since I shared how my Roth IRA was doing. I checked my retirement account in October 2008 and shared how it went down over 20%. That certainly stung, but I didn’t withdraw money in reaction to the market. 

Since I’m investing for the long term, I realize that sometimes you have to accept the losses.

I’m happy to say things can climbing back up slowly. Here’s a screenshot from Mint of my Roth IRA’s returns for the last 6 months:

2009 IRA Returns

It looks good, but I’m anticipating more ups and downs with this market as I invest for retirement. 

Talking a bit more about the fluctuating returns of the stock market, here’s some information from Behaviorial Gap on the average returns from the stock market:

Average Is Not Normal       

As you look at slide #9, you notice that returns rarely fall into the average range of 9-11%. It can be easy for someone to get emotional based on the markets performance. Don’t do anything rash though. 

How can you prevent yourself from getting emotional and pulling money out from retirement? 

Automating your retirement contributions is way to invest without stressing over how the market is fluctuating. 

Short-term investors read magazines and watch TV shows that keep announcing THE stocks and mutual funds to buy every 3 months or so. Unfortunately this strategy rarely pays off. 

Long term investors focus on setting up their Roth (or traditional) IRAs, decide what to invest in, and automate their contributions. As you check on it, you may rebalance it to keep you asset allocation on track.  If you have a lifecycle fund, this is already done for you as it adjust as you get closer to retirement.

Have about you?

Have you been steady with your retirement contributions?  Have you taken money out of your retirement fund? If so, why? Any tips or suggestions? 

 

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