For those that follow me on Instagram– last month, I shared that I would have a Chartered Financial Analyst (CFA) charterholder, answer your investing questions just in time for the new year and TFSA limits refresh. With that, here is the Q&A below.
Before we get into the Q&A, I’d like to state that the answers are just my opinion. It should not be deemed actionable advice without your own due diligence. The answers are rather broad observations and insights I’ve picked up over the years.
From those questions, three themes came out strong: how much should they save/need to retire, how much risk can they assume, and asset classes (real estate vs. stocks vs. ETFs, etc.) I answered this post mainly around getting started, and retirement savings etc.
Some strong themes came from the list of questions, so I’m going to write a two-part post. The first series will be around how to start investing and what retirement might look like. If you have a follow-up question, please direct them to Michelle.
How Do I Start Investing?
There’s an overwhelming amount of information out there, and there is definitely no shortage of commission-based advisors out there ready to pounce.
Let’s assume by investing, you mean you want to use your money to generate more of it and that your question is really asking ‘How do I start making my own investing decisions?’
The short answer is: open up for a self-directed brokerage account, deposit some money, and buy stocks!
The long answer is, ask yourself if you’re ‘ready’ to start investing and why you want to invest on your own. Readiness includes being crystal clear with your own financial objectives and sticking with it no matter what indexes and prices are doing each day/hour/minute.
Readiness also includes having a crystal clear understanding of your risk tolerance – how much risk are you willing to bear? How much can you tolerate? How long are you planning to stay invested for? Higher returns typically come at the cost of higher risk – are you okay with this? Having a deep understanding of the markets is not required to begin investing, but having a deep understanding of your personal attitudes and emotions towards your money and its gains and losses is critical.
For example, if you saw the markets repeat what happened earlier this year, would you have sold? If yes, you would have missed an incredible recovery. This is where working with a licensed professional is advantageous.
When you feel like you’re ready, do your best to understand the news and companies that you notice yourself gravitate towards. Open an account at a brokerage to hold your investments – you’ll need to have a brokerage account so that assets can be bought/sold with relative ease (low cost and timely) through their brokerage.
The account can be a non-registered account, or a registered account. Non-registered accounts will be subject to standard taxes on capital gains, interest, and dividends. Registered accounts will have tax efficiencies. The most common registered accounts are the TFSA, which are funded with after-tax income, but returns are tax free, and the RRSP, which are funded with pre-tax income, but taxed as income when you withdraw from it.
Once you’re set up, all that reading up on the companies that you like are ready for your investing attention. Do you like it enough to own a piece of it? Do you see it growing? Do you see value in it? Most importantly, does it fit with your financial objective and risk tolerance?
How Much Do I Need To Retire?
Answering this question is impossible without knowing anything else about you. At a minimum, I can’t answer this without knowing about your financial health and your current and planned lifestyle in the future.
However, if you have ‘the number’ in mind, you can figure out what you need to do between now and your retirement date in terms of savings and investing. ‘The number’ is commonly referred to as what you need in assets the day you retire. I know what you’re thinking. This answer doesn’t really help you … so here’s a scenario that is jam-packed with assumptions that might provide some ideas.
Assume you’re 30 years old, and plan to retire at 70. You think you’ll need at least $100K per year (pre-tax, no inflation assumed) to sustain your current lifestyle in retirement. You’ll likely live to 100 years old but would like to pass down a comfortable $1M estate to the next generation.
Your working years, from age 30 to 70: Assuming you have zero savings today, at the end of each year, for 40 years, you will need to invest ~$6K in an asset that returns 7%. At retirement, you will have built a portfolio close to $1.2M. Assuming you don’t touch it for this entire time period, you did good! Compounding is incredible, eh?
Your retirement years, from age 70 to 100: When you turn 70, you withdraw $100K at the beginning of each year, for 30 years. Your remaining assets over that time period generate 7% per year, and when you hit 100 years old, you are able to pass down about $1M to the next generation.
As you can see from this example, there are A LOT of specific details to the individual/household. If you have come across other sources of content/information that recommends a generic retirement number, approach this with the absolute strongest level of skepticism … unless you think you fit into a box (which we know you don’t!).
I Work at a Company That Provides a Pension but Might Not Stay Until I Retire. What are My Options With My Pension?
It’s rare in today’s world where employees are still entitled to a Defined Benefit Plan. Defined Contribution Plans are more common, where employers match your RRSP contribution or have some other type of retirement savings incentive for you.
Defined Benefit Plans are retirement plans where the employer has the obligation to pay you a benefit in your retirement years (all the way until you are no longer with us). So while you are an employee, they take your retirement savings off of each paycheque, invest it, and only pay you back when you retire.
Defined Benefit Plans assume the investment risk on your behalf. No matter what happens with your retirement savings, you are guaranteed a certain amount of income (determined by your salary, years of service, etc.) So, if your money actually grows higher than what they promise to pay you, you don’t get it. But if your money grows slower than what they promised you, you are safe from realizing the loss.
This is important to know and think about in your own context. When departing your employer, you will have two main options: opt to remain in the pension plan or opt to invest your funds elsewhere in a locked-in retirement account (an account that you cannot contribute or withdraw from until retirement).
So you need to ask yourself: Can I generate a better return than what they are offering, and can I assume the relative risk that comes with it? More specifically, how many years do I have until retirement, and what’s the cash flow I need in retirement?
A qualified professional will be able to answer these questions for you handily. My suspicion, however, is that you are likely to outperform the pension return – again, it comes down to the risk you are able and willing to bear.
I Would Like to Know More About Saving Tips!
I’m going to defer to one of the wealthiest people on the planet for this one.
“Do not save what is left after spending; instead spend what is left after saving.” – Warren Buffett.
About the author:
Trevor Lee, MSc, CFA, is a registered Portfolio Manager at a discretionary portfolio management firm based in Vancouver, BC. He focuses on building high-quality investment portfolios for investors of all sizes.
Disclaimer:
The content in this post is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this post constitutes a solicitation, recommendation, endorsem*nt, or offer by myself, my firm, or any third party service provider to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.
