I'm not a financial advisor. I'm simply a retired photographer. Yet, I've done well in retirement. My portfolio is much larger today than it was when I retired. And I've pulled off this magic trick despite having to withdraw money annually to live in retirement. How has this been possible? Luck!
I retired in early 2009 in the middle of the one of the worst market crashes in history. I put every penny into the market. It was the best move I've have ever made. The luck was not in investing. That is rarely a bad move, especially if you have a long time horizon. No, the luck was having the market at an historic low. One cannot plan for events like that but only take advantage of them if given a chance.
My financial luck has burnished my reputation as a knowledgeable investor. I do my best but take my thoughts with a grain of salt, as they say. I'm a retired photographer, not a financial advisor, and never forget it.
Now, to get down to the reason for this post: to give a well-loved grand niece some financial advice on how best to save for retirement. Because this post is directed to one person, some of the stuff touched upon will be very specific.
First: my niece has a company pension. What kind of plan is it? She must find out. Is it a DB (defined benefit) plan or a DC (defined contribution) plan? The Government of Canada has a page examining both approaches. Here is a link: Employer pension plans.
The important thing to remember is that a defined benefit pension is predictable. It is not directly subject to stock market volatility. When the pension begins, monthly payment is pre-determined. On the other hand, a defined contribution pension has contributions that go into mutual funds. Those mutual funds are subject to stock and bond market fluctuations, the investments will rise and fall in value. The pension’s eventual payments will depend on how the investments performed over the years. Read this article in MoneySense: Understanding your company pension plan.
My gut feeling is my niece has a defined contribution plan to which the company matches my niece's contributions up to a maximum of 1% of her gross income but with one caveat; the company's contribution is not to exceed $1000 annually. The 1% contribution is the minimum allowed by law.
In most cases like this, the employee should take full advantage of the company's matching contribution offer. To do less is leaving money on the table, as they say. Take all the company money and double your retirement savings instantly, but that's not all one can do.
Most defined contribution plans are a mix of mutual funds: Canadian, U.S. equity funds plus international equity funds and bond funds. Ideally, the mix of mutual funds will match your investment risk profile. Often plan members are encouraged to select a mix of investments that match their investment temperament and goals.
My wife, a very bold lady, was a member of a DC plan. She picked the mutual fund mix that offered the greatest growth at the most risk. This meant it was equity heavy and bond deficient. One must make sure that the investment mix accurately reflects their stomach for risk.
Investments go up and investment go down. Bonds tend to even out the ride. Bold investors choose an 80 (equity) and 20 (bond) mix. More conservative investors like a 60:40 split. Me? I have no bonds. None. But I may be going to 90:10 mix in the future.
There is a maximum amount a person can tuck away in an RRSP. If, after contributing to the company plan, one has more money to invest, money over and above that matched by company, many believe it is will do best put into a bank-offered RRSP. Why? The management expense ratio (MER) or investment management fees (IMF) should be much, much lower.
Most company pension plans are run by large financial institutions occasionally charging as much as 3% for the institution's expertise. That's a lot. I believe my relative may be paying around 2.75% in management fees. I'd wager she almost certainly is paying more than 1.5%. She should look into this. If her management fees are at 1% or below, she can leave her plan untouched and just modify the bond component to get better growth (with more risk.). Compare this to a complete portfolio in one ETF like XGRO. It has a MER charge of only .2%.
I like XGRO but there is also a similar asset allocation ETF from Vanguard, VGRO, and one from the Bank of Montreal, ZGRO. If the growth aspect frightens you. There are other portfolio mixes. Some are more balanced, others try to be even more conservative and still others are weighted toward dividends.
The problem with ETFs is that one needs a self-directed plan to buy these. The ET stands for exchange traded. Furthermore, unless one has a minimum of $15,000 to $25,000, depending on the bank, there is a quarterly plan charge. This fee reduces the advantage of low management fees. Many ETFs today can be purchased trading fee free.
Mutual funds, on the other hand, can simply be purchased at the bank. On the downside, the MERs are higher than those for ETFs. My advice? Put retirement money in mutual funds held inside an RRSP until one has enough to open a self-directed investment account large enough to escape paying the quarterly charges. Fees are portfolio growth killers.
I don't know of any complete portfolios in one mutual fund but since there is no fee for buying many mutual funds building a complete portfolio is not all that difficult. Here is my attempt. I have created a demo portfolio and will begin tracking it as of last Friday. The MER charges with this mix is in the .85 range.
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