The Learning Centre:
Retirement 101: 5 investment strategies to get you saving beyond your pension.
Pension contributions. Union dues. Summer cash flow. Saving for a 4 over 5. How do you meet all of these challenges on an Ontario teacher's salary PLUS cover your regular day-to-day expenses AND also save for retirement?
That’s right, we said SAVE for retirement. We know that you have a great pension plan in place—and that’s, well, great. But will it be enough?
According to the Ontario Teachers’ Pension Plan (OTPP), there are over 135 retired teachers in Ontario over the age of 100.
While increased longevity is definitely a good thing, on the flip side it can present a financial challenge that perhaps you hadn’t thought about: the possibility you could be in retirement for more years than you will actually work. Which means you may need that pension income to stretch for even longer than you thought.
Manage the day-to-expenses you’ll still have in retirement.
Will you still be paying off your mortgage? Do you have dreams of travelling the world or spending winters on some sunny beach? And what about extended healthcare in case you or your spouse needs to move into an eldercare facility? Retirement brings a whole new set of experiences and financial challenges.
That’s why saving beyond your pension income (with the help of the right investment strategy) is key to ensuring financial peace of mind in retirement.
Here are 5 specific investment strategies that can put you on the right track to saving for retirement:
Investing for retirement strategy #1: Mutual funds (if you’re 10+ years until retirement).
There are many benefits to investing in mutual funds to build up your retirement savings, however we’ve narrowed it down to the top 4:
- Low ‘cost of entry’: You can invest for as little as $500, making it the perfect investment if you can only afford to start out with smaller contributions—then increase those contributions as you move up the pay grid.
- Built-in diversification: Investing in mutual funds is kind of like being a part of the ultimate car pool, except with way more people AND you make money from it. When you buy a mutual fund, your money is combined with the money from other investors—allowing you to buy part of a pool of investments (this is because a mutual fund holds a variety of investments). This can make it easier for investors to diversify than through ownership of individual stocks or bonds. And because not all investments perform well at the same time, holding a variety of investments could offset the impact of the low performers, while taking advantage of the higher earning potential of the rest.
- Professional money management: While you may be the world’s best English or math teacher, ‘investment planning’ might not be your area of expertise. Not a problem. Portfolio managers are a package deal that comes with investing in mutual funds. They decide where to invest the money, when to buy—and when to sell based on your timeline, goals, and level of risk. The mutual funds offered through Educators Financial Group are managed by leading investment managers, hand-picked by us.
- A multitude of choice: Mutual funds offer varied investment options to suit your goals, risk aversion, and retirement timeline. Early in your education career: You may feel comfortable taking more risk to achieve greater potential return—in which case you may decide to invest in an equity fund.
Middle of your career: You may be trying to balance risk and return more moderately, so investing in a balanced mutual fund that buys a mix of stocks and bonds might be more your style.
Approaching retirement: This is the time of your life when you might be less comfortable with risk and more interested in fixed income investments—so investing in a bond fund might be the right fit for you.
Investing for retirement strategy #2: Guaranteed Investment Certificates – GICs (for a balance of risk and return in your portfolio/shorter time frames).
GICs are an easy and secure way to invest your savings for retirement. The main benefit is the fact that the interest rate you receive on your GIC is fixed for the term of your investment. Typically the longer the term, the greater the interest—guaranteed.
Many Canadians tend to like using GICs as a way to save for retirement because they like knowing their investment is not at risk and the funds will be there when they retire.
A few other benefits that make GICs a smart retirement investment strategy:
- There are no fees associated with a GIC
- Can be held in a RRSP or RRIF for retirement purposes
- Interest earned will not be taxed while held in an RRSP or RRIF (withdrawals will be taxed in the year of the withdrawal)
- Can be held in a TFSA—interest earned will not be taxed (neither will the funds when they are withdrawn from the TFSA)
Investing for retirement strategy #3: Principal Protected Notes – PPN (for safety + potentially higher returns).
PPNs are similar to bonds. When you buy a PPN, you are lending the issuer (usually a bank) money (i.e. ‘principal’) to invest. At maturity, your original deposit is returned, along with any interest.
The main benefits of investing in PPNs:
- Designed to protect your capital
- Capital is guaranteed by a secure financial institution
- They tend to give you a better return than a conventional GIC
While the bank guarantees your deposit, interest payments may vary depending upon how well the investments perform. You should be aware that your capital is only guaranteed if you stay invested until maturity, which can be up to 10 years. There is no assurance of securing any interest or other return on your investment. Withdraw sooner and you face potential penalties and losing the guarantee on your principal.
Investing for retirement strategy #4: Registered Retirement Savings Plan – RRSP.
An RRSP can hold savings accounts, GICs, bonds, mortgage loans, mutual funds, corporate shares, foreign currency and labour-sponsored funds.
Benefits of an RRSP as an investment strategy:
- Interest earned on investments inside an RRSP isn’t taxed until it’s withdrawn
- While your investments sit in your RRSP, their growth is tax sheltered, allowing them to grow more quickly
- Your RRSP contribution can reduce the tax you pay now (the total amount of your annual contribution can be deducted from your gross income at tax time, reducing the amount you pay in income tax that year)
- You can take any tax rebate you may get as a result of your RRSP contribution and use it to contribute next year (if you have enough RRSP contribution room)
- You will likely pay less tax since you will probably be in a lower tax bracket as long as you take the money out gradually from your RRSP in retirement (taking out too much at once could push you into another tax bracket and may affect other benefits such as Old Age Security)
Investing for retirement strategy #5: Tax-Free Savings Account – TFSA.
TFSAs are pretty much perfect. As the name says, any growth, whether interest or capital gains, is tax-free when you make a withdrawal from your TFSA. More than just ‘savings’, a TFSA is another type of registered plan that can hold GICs, mutual funds, bonds, or stocks.
Key benefits of using a TFSA as an investment strategy for retirement:
- No minimum contribution
- Can make contributions throughout your life (unlike RRSPs)
- Contributions can be from any source of funds, not just employment income (also unlike RRSPs)
- Money can be pulled out without penalty (but can’t be replaced until the following year)
- Unused annual contribution limits are cumulative
- Doesn’t need to be converted to a RRIF
- No income tax deductions
When it comes to saving for retirement, the more you plan ahead—the better off you’ll be.
Of course life and all of your commitments at school can get in the way of that planning.
That’s what we’re here for.
Educators Financial Group can develop your own customized investment strategy to meet your retirement timeframe, tolerance for risk, and most importantly—your dreams. Because life ‘after school’ should be spent wherever and however you want.
Curious on whether your pension will be enough? Use our Pension Income Gap Assessor to find out!
Have questions? Have one of our financial specialists contact you to put your retirement investment strategy to work.
Moneysense, “Gail’s Take: RRSP vs. TFSA.” http://www.moneysense.ca/columns/rrsp-vs-tfsa/
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy. Commissions, trailing commissions, management fees and expenses may all be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, as their values change frequently and past performance may not be repeated.