The article “How To Start Investing Late In Life” was originally published on MoneySense on February 11, 2018.
It’s never too late to start playing catch-up
Q: I am a late bloomer. I finally have an empty nest, but I had low income employment and always lived with my nose 1 inch under the water. I finally have a good paying job at a bank, minimal debt, and I want to save. I have no idea where to go. My bank opened an investment account and I can finally put money into it this month. Please help.
A: Don’t feel bad about being a late bloomer, Pamela. Life happens, and we do our best. And don’t feel bad about needing help with your investment strategy. They don’t teach you this stuff in school and I frequently meet intelligent, successful people who don’t know the first thing about personal finance or investing.
First things first, you should figure out what kind of investment account the bank opened for you. Given you work at a bank, I’m wondering if this is some sort of account related to your employment? Often employers will offer defined contribution (DC) pension plans or group registered retirement savings plans (RRSPs) with matching contributions made by the company. This means you contribute a percentage of your salary and they will match a percentage, up to a certain dollar amount or percentage.
Matching contributions are free money. It rarely makes sense to forgo the maximum contribution required for that free money, Pamela.
RRSPs or DC pension plans result in tax deductions for your contributions, meaning you can save more. The investments grow tax-deferred, meaning no tax as the investments grow. Withdrawals are taxable to you in the future. If your income is higher now than it has ever been before, and you haven’t done much saving in the past, I’ll bet your tax bracket will be lower in retirement than it is now. Tax deductions today when your income and tax bracket are high are beneficial if you can take withdrawals in the future at a lower income and tax bracket.
If your income is fairly high, RRSPs and DC pensions are probably better than tax-free savings accounts (TFSAs) – another type of account you may have heard about, Pamela. So, your company RRSP or DC pension may be preferable to a TFSA even without a matching contribution from your employer. The match just makes these tax-deductible accounts even more enticing.
Once you figure out what kind of account you have and how much you’re contributing, what to invest in becomes the next decision. Think of your account as a box. You can put different types of investments in that box. If it’s an employer account, they probably have a pre-determined short list of investment options to make it easier. The fees are also probably competitive as well.
Determining the mix of stocks and bonds is more art than science in my opinion, Pamela. There are old-school rules of thumb like having your bond exposure equal your age. The concept is helpful, because an older person would end up with more exposure to bonds and less to stocks using this approach. An older person is likely to be closer to needing withdrawals from their investments, but the age formula concept doesn’t always work.
You could have a young person saving and planning to use their savings for a home downpayment next year. Having a high allocation to stocks wouldn’t make sense if all the money was needed in a year. Or you could have an older person with a large defined benefit (DB) pension income paid to them every month who doesn’t need to take any withdrawals from their investments. I’d argue the young person should have little to no stock exposure and the older person could have lots of stock exposure.
Here’s a decent risk tolerance questionnaire from Vanguard, Pamela. Hopefully your employer provides some sort of tool to help assess your risk tolerance as well that could complement this.
I would also encourage you to determine your other sources of retirement income as you work, save and plan for the future. The Canada Pension Plan (CPP) will provide a monthly retirement pension income to you based on your historical CPP contributions. You can order a Statement of Contributions to help assess your future CPP entitlement here. You can start this pension as early as 60 or as late as 70. The earlier you start, the less you get.
The maximum CPP retirement pension is currently $1,134 per month, but the average pension is less given not everyone contributes the maximum for their entire career. The current average is $642 monthly.
The Old Age Security (OAS) pension is payable as early as age 65, but can also be deferred as late as age 70, resulting in a higher pension the later it starts. It is based on your years of residency in Canada, so if you’ve lived in Canada for most or all of your life, you should be entitled to the maximum. If you haven’t, you will receive a pro-rated pension. You need 40 years of Canadian residency between the age of 18 and 65 to receive the maximum, so if you will have 20 years of residency, you’ll receive half of the maximum. The maximum is currently $587 per month.
Hopefully this gives you something to go on, Pamela. If you don’t have much investing or financial knowledge, start small and build upon it. In the same way, you’ll start with your small retirement nest egg and grow it. Do your best and as retirement approaches, it’s important to assess what your retirement income sources will be and how they will compare to your spending. With your eyes wide open, you can plan your retirement as best you can between now and then, regardless of what has happened in the past.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.