Ok, we know how much money you need/want for your retirement, you have the steps to take 10 years out, and you have decided whether or not to take your CPP early—so what’s next?
How are we going to make your money make more money?
There is a raging debate on where to put your money: Should you pay off your mortgage, buy a RRSP, or put your money into a TFSA?
Hopefully, we can demystify the conundrum.
We need to start in determining what your risk tolerance is. Everyone has a different take on how much risk they are willing to take at various stages in their investing career. The old adage is the higher the risk, the higher the reward. The converse is true in that the lower the risk, the lower the reward. This is nothing new, but what is new is that today people can put their money in a variety of investment vehicles to achieve different goals. If you have been following my posts, you have already found out your financial independence number (FIN), your assets and liability numbers, your income and expenses, and your retirement goals. When we marry this to your risk tolerance, a plan can be made.
Investments and their level of risk from lowest to highest
1- Savings accounts
Usually the first account you open is a savings account. You put your money into the bank, and they, in turn, invest it into mortgages, loans, and other things. In return, they give you a percentage of their profits in the form of an interest payment. These are very safe and are guaranteed by the government and insurance companies.
2- High-yield savings accounts
They may pay a little more than regular saving accounts and are fully guaranteed by the government. The main difference with a high-interest savings account is that you will be charged for everything you do, like paying bills, withdrawals, paying bills, and things like that.
3- Government backed saving bonds
They are a promise by the government to pay you back a certain amount of interest if you leave your money with them for a specific period of time. The bonds could be federal, state/provincial, or municipal backed. They are guaranteed but, once again, do not earn much. Government bonds are used to finance different projects the government embarks upon. You can also sell them, and their value fluctuates as the general interest rate goes up or down. If you own bonds that are paying more than the posted interest rate, they are worth more. If the posted interest is more than what your bond pays you, the value of the bond is less.
- Regular interest bonds pay when you redeem the bond at the designated time period you bought them for—1 year, 2 year, etc.
- Compound interest bonds pay interest on the interest earned on a periodic basis, often yearly or semiannually.
- Coupon bonds have actual coupons attached to them, and the coupons are returned for the interest portion of the band. These are usually annual or semiannual payments.
4- GICs and CDs
Guaranteed investment certificates (GICs) and certificates of deposit (CDs) are safe because they are guaranteed. They come in amounts of $500 or more. The interest can be paid on a monthly, semiannual, or annual basis.
5- Money market funds
These are mutual funds that invest in savings account, GICs, CDs, and bonds. They are usually very safe. But there is a variance of risk depending on which countries and economies the fund is invested in.
6- Corporate bonds
They are very similar to government bonds in that they promise to pay you a certain amount to of interest if you leave your money with them for a certain period of time. The major difference is the degree of risk with the company who offers the bond. Bonds are generally less risky than a share from the same company, but there is an inherent risk. For your protection, these bonds are usually rated by Fitch Ratings, Moody’s, or S&P Global Ratings as to their creditworthiness. The ratings go from AAA to C. Junk bonds are called this because they usually give a higher interest rate to compensate for their higher risk.
7- Mutual funds
Mutual funds are professionally managed investments that are usually a pool of various stocks. Many investors invest their money into a fund, and the fund manager researches and creates a fund based on a variety of stocks. This usually is safer than buying individual stocks because you have diversified. You make money by the increasing value of the stocks and dividends. The dividends can be paid out but are usually reinvested in more units of the fund. There are many different funds: equity, fixed-income, index, balanced, money market, income, international/global, specialty, ETFs, to name the most popular ones.
Exchange traded funds (ETFs) trade in a wide range of securities, just like mutual funds, but the main difference is that they are traded like stocks all day long, whereas mutual funds are traded once a day and at the end of the day when the NAV (net asset value) is determined. Generally, ETFs follow specific stock market indexes, which means that they follow a section of the stock market, like commodities, technology, or healthcare for instance.
9- Dividend-paying stocks
When you purchase a dividend paying stock, you are buying a piece of a company. The company agrees to pay you dividends as a form of profit-sharing for your loyalty. Dividends can be paid monthly, quarterly, semi-annually, and yearly. The stock price can go up or down, but generally the dividends will be maintained. You make money by the growth of the stock and the dividends being paid. Neither the value of the stock, nor the dividends are guaranteed, but if you are buying a “blue chip” stock, your confidence can be higher than standard stock. These dividends can be paid out to you or can be reinvested in top buying more shares.
10- Preferred stocks
Similar to dividend-paying stocks, a preferred stock is a part ownership in a company. Preferred stocks have a higher claim to dividends, and in the event that dividends are suspended, those with preferred shares can have the right to receive their dividend in arrears. Although they have no voting rights in the company, if the company goes broke, they will get a share of the assets of a company before regular shareholders but after bond holders.
11- Fixed annuity
A fixed annuity is a contract with an insurance company that stipulates that for a fixed amount of money upfront, you will get a guaranteed amount of money on a fixed basis when you retire. These contracts vary with each company and must be carefully read and explained to make sure that you are getting what you want and that you know what will happen if you pass away early.
There are hundreds of books and strategies to investing in the stock market. You can either do it yourself or engage a financial consultant (stock broker) to help you. You can do well in the market, but there are many factors to consider: knowledge, time, risk tolerance, stress tolerance, and your ability to keep emotions out of investing. There are paid advisors, online brokers, and robo-advisors that can help you. People have been known to do well, and others not so well.
Other forms of investing include creating a business out of your passion, real estate, art, collections, and a host of others. Each take thought, planning, and action.
I would be happy to spend some time talking with you to brainstorm some ideas.