How much time do you have left? This may sound like a morbid question, but only if you are thinking about mortality.
If you are investing your money and will need it to produce an income for you at some point down the road, the meaning of the question has changed dramatically. The amount of time you are investing for (before you turn it into an income stream) will greatly affect the type of investment vehicle in which you choose to put your savings.
If you were investing or had a mortgage in the 1980s, you most likely remember the interest rates of that period. It was not unheard of to have an 18% mortgage or get a GIC offering in excess of 20%.
You can bet there were many people retiring at the end of the '80s who were basing their future incomes on GICs returning more than 12%, knowing they would be OK even if rates dropped as low as 10%.
You know what happened next. Today we are lucky to find a GIC that will offer us more than 2.5% and if we do, we will likely have to tie our money up for a minimum of five years!
Time is your No. 1 ally in taking on investment risk. Ultimately, where you invest will be determined by how hard your money needs to work based upon your goals and objectives. If your investment time frame is long and you have few other sources to draw income from in retirement than your savings, then you should consider riskier investment alternatives to GICs and bank accounts if the current rates are not sufficient to produce the income you will need -- or you will have to reduce your income expectations in retirement.
When you are drawing income from your investments, a smart income strategy is to break your savings into three buckets: short, medium, and long-term savings.
Your short-term savings bucket should be in liquid investments that will cover your income needs for one-to-two years.
Your medium-term bucket is for larger-ticket purchases over the next two-to-five years and to also replenish the income taken from your short-term savings vehicle.
The long-term bucket should invest in assets that historically can withstand the ups and downs of economic cycles and produce enough income to replace the funds drawn from the first two buckets.
Retirement can last a very long time and it can be argued that longevity is one of the biggest risks to your financial health. Investing your savings in a manner that does not consider your income needs for the long term increases the odds that one day you will outlive your money.
— Doug Riding is a senior associate with Investment Planning Counsel. www.ridingteam.ca