Being a 50-something today is not like it was years ago, when retirement at 65 was the norm and adult children were out of the house, trying to make it on their own.
Now, many Canadian are working well into their golden years, while dependents – both aging parents and still-at-home kids – are putting added pressure on household finances.
The good news? Many people hit their peak earnings years in their 50s, mortgages tend to dwindle substantially and the light at the end of employment tunnel can be seen, if only dimly.
Most people this age should be saving more than they have in prior years and if they’re not, they have to start, says Matthew Williams, senior vice-president with Franklin Templeton Investments.
Get rid of debt
The first step to financial freedom, which is what many 50-year-olds should be thinking about as they approach 60, is to pay down any non-deductible debt, says Williams.
It’s a must-do for two reasons: it’s rarely a good idea to go into retirement owing money, especially if a regular paycheque isn’t coming in anymore, and it frees up your finances to increase your retirement savings.
Fifty-somethings do need to save more – a 2015 BlackRock poll found that Canadians aged 55 to 64 have only $125,000 in savings, even though most say they need $47,000 a year to live comfortably in retirement. A 2016 study by the Broadbent Institute also noted that half of those in that age cohort have no employer pension.
That’s why debt repayment is so important. “If you pay down your debt, you can then redirect those savings into an appropriate retirement account,” Williams says.
Stick with equities
Where to save is also different these days than in the past. For years, the rule of thumb has been to shift into more conservative investments, such as bonds, as you get older, but as people live and work longer, there’s a case to be made for sticking with equities.
As well, owning too much fixed income could harm a portfolio’s returns in the future, says Williams. For the last 30 years, bonds have soared as interest rates have fallen to record low levels. Now, yields are starting to rise and as they do, bond prices are expected to fall.
If anything, one’s asset allocation in their 40s, whether it’s half equities and half bonds for a more conservative investor or 80% equities and 20% fixed income for a more aggressive one, shouldn’t necessarily change much once they hit 50, says Chris Turnbull, founder of The Index House, an Edmonton-based advisory firm that invests using passive products.
There’s nothing wrong with being more heavily weighted to equities, says Turnbull. “Retirement is still 5 to 15 years away,” he says. “Just because someone turns 50 their asset mix shouldn’t change.”
What matters most is that 50-somethings are properly diversified, says Turnbull. While that’s true for any age, it’s especially important for older Canadians as they don’t have as much time to catch up if their portfolio underperforms.
He recommends investing in at least four low-cost exchange traded funds (ETFs), adding that high fund fees can also negatively impact one’s retirement savings. One of those ETFs would be a bond fund, with equity assets being split evenly between Canadian, American and international stocks.
“The asset mix is the engine that drives the portfolio, whether you’re 30 or 50,” he says. “Be geographically diversified and take a broad index approach. It shouldn’t be any more complicated than that.”
Williams agrees that geographic diversification is key, especially since the tendency for Canadian investors is to over-index in homegrown companies. This country accounts for about 2% of global GDP, and with our market concentrated in financials, materials and energy, adding more diversified markets, such as U.S. and international assets, is a must.
Start planning for your 60s
Once you hit 59, your debts should be paid off and your savings should be growing. You don’t have to get more conservative just yet, but you should start creating a retirement budget that outlines what you think you’ll spend in your post-working years.
Then start making spending adjustments to ensure that when you do finally retire, you’ll be able to live a good life as a retiree. “You don’t want to suddenly go from $100,000 of income to $45,000 and then be shocked at what you can and can’t do,” Williams says. “Start that process in your late 50s, not when your 65.”
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