This is one of the most common questions asked of a Wealth Advisor and almost every single advisor will give you a different answer. Before they can properly answer this question for you, there are a few questions that you will need to have answers for first:
At what age do I want to retire?
What are my plans throughout retirement?
How much money do I need annually to accomplish these plans?
With answers to these questions an advisor can put together a savings plan that will complement your retirement plans and ensure you are set up to reach your financial goals. However, there are always a number of variables to be aware of that can change your plan. These include things like inflation, interest rates (rate of return) and amount of risk you are taking within your investment portfolio.
Inflation can be defined as the rise in price of the daily goods you consume. This can be everything from gas to clothing to your daily coffee. As prices continue to increase the money you have saved has less value. For example, an investment account that earns 5% annually but is in an environment where the inflation rate is 3% has technically only made a 2% return. The Bank of Canada works hard to keep inflation rates between 1-3% annually and this can be factored into your financial plan.
Rates of return speak to the gain (or loss) you make on your investment. The higher the rate of return, the more money you have made in relation to the amount you have invested. When completing a financial plan be sure to set your rate of return at an “average” return to ensure you are being fair to yourself. Setting the rate of return too high and not achieving that return can leave you strapped for cash in retirement, while setting it too low can result in you saving exorbitant amounts, which will be more than necessary. The “average” rate of return you set in your plan depends on how much risk you take within your account.
With every investment comes risk in some way, shape or form. Those who don’t like to take risk are called “risk averse” investors and tend to stick to lower risk investments such as Guaranteed Investment Certificates (GICs), Money Market or Income Fund mutual funds. Those who are willing to take a higher risk tend to invest in aggressive growth portfolios or funds that tend to have a larger amount of risk. The difference between a low risk investor and a high risk investor is the potential for higher gains as a high risk investor. The more risk you are willing to take the more opportunity for reward. Notice the word “opportunity”. This is not a guarantee and high risk investments have a risk of actual loss, however it’s fully dependent on how the investment performs.
Inflation, rates of return and risk are all major components in determining how much you should be contributing towards your retirement. I encourage you to contact me today to find if you are on track for your retirement. Young or old, we all want to retire. Why not start planning now?