Priorities will change with age
Life-cycle strategies: Young people should treat education as an investment
Monday, February 10, 2003
Despite what cynics might say, nothing in life is all about money, not even retirement savings planning. Building and maintaining a financial plan for retirement is as much about knowing how much to save as it is knowing how to prioritize through what, for most people, is a path that has its share of challenges.
Each phase in people's lives comes with different hurdles, priorities and goals, and while retirement savings plans should be tailored to an individual's circumstances, there are some generalizations that can be made for financial goals in each of these phases.
Young adult "People in this age group should establish a good credit rating," says Vancouver-based Michel Matifat, national practice leader in the personal financial planning division at KPMG.
"They should learn to manage their cash resources efficiently. If they do so, and they learn to live within their means, they are establishing a good basis for the future."
Carey Vandenberg, a chartered financial planner with Partners in Planning Financial Services Ltd. in Vancouver, agrees: "They should avoid getting caught up in trying to have what their friends may have, such as a new car.
"Most of the successful people I have seen in this age group tend to have purchased a condo or some other smaller piece of property early on and rented it out. They've started a small monthly RRSP. Doing a lot of little things will make a huge difference in their financial success and calmness when other responsibilities and opportunities present themselves," he says.
Investing in an education should be a top priority, Mr. Vandenberg says. "As was pointed out in a presentation by Moshe Milevsky, a professor of finance at York University's Schulich School of Business, your education and the increase in income it can provide you with over the long term is part of your personal balance sheet."
Ryan Michael Clark, a 25-year-old Calgarian, has already benefitted from investing in a post-secondary education. With a degree in computer science, he was able to find a good-paying job as a computer programmer. "I was lucky because it was a high-paying job, so I had some money to put away," he says. Without any debt, and with some savings, he is now in a position to pursue his new ambition -- a Master's degree in psychology.
YOUNG FAMILY Ken Yun, who is in his 30s and lives in South Burnaby, B.C., with his wife and new baby, started thinking about retirement when he was 22. "After marriage and baby, I changed to more stable investments, bought more RRSPs, and more of my family income now goes toward mortgage, car payments and bills," he says.
Mr. Yun is on the right track. Mr. Matifat says this is the time in life when people begin to expand on the financial management skills established in the first decade of adulthood. It is time to seriously start building for retirement, to try to maximize the use of registered education savings plans, RRSPs and company pension plans. He suggests couples save 5% to 10% of earnings.
"The quicker they can buy a house, the better because it's a forced savings," he says.
Mr. Vandenberg's recommendations for young couples: "Itemize and balance what you need and want to do now with what you want to do in a couple of years, as well as what you need to provide for in the very long term.
"Don't try to live like how your parents are living now. They worked and sacrificed for the past 30-plus years. Don't get caught up in the new-car leasing or borrowing trap. Save a bit each month automatically and buy a replacement car. You will be saving a lot in interest costs, which means more money for other things. Your kids' educational expense comes first. Retirement is further down the road."
EMPTY NESTERS By the time most people reach this phase, they tend to have more funds available and are in a higher income bracket. If they have planned ahead, saved for their children's education, put away money for retirement and worked away at debt, they are in a strong position.
My husband and I fit into this age group, but with three children spanning ages 10 to 19, we find ourselves smack in the middle of phases. Yet, perhaps because we feel we've paid our dues, although still facing a few more, we have loosened the purse strings, allowing ourselves some of the luxuries we would never have considered when our children were younger. It may not be the smartest move on our part.
"The more money you become accustomed to spending now the more money you will need to retire on," Mr. Vandenberg says. "I often get asked: 'How much do I need to retire at such and such an age?' That all depends on what kind of lifestyle you have become accustomed to living."
The financial goals for people in their 40s and 50s should focus on achieving financial independence upon retirement, says Mr. Matifat. Concentrate on paying off the mortgage and accumulating as much wealth as possible, possibly through additional, non-registered investments, as well as maximizing RRSP contributions.
Retirees New retirees should try to live off the proceeds of non-registered investments first, and postpone converting RRSPs to RRIFs or annuities for as long as possible (mandatory at age 69). That is because taxation on non-registered investments is lower than on RRSPs.
"Given some of the market trends, perhaps some have less funds than they believed they would; others might find themselves in a higher income bracket than they planned," Mr. Vandenberg says. "This is the time for people to recalculate and project how long savings will last and whether they can continue to spend at current levels. These projections should be done at least once a year to ensure their money expires after they do."
A special report on personal finance.; Part two of a three-part series.
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