Clark Wealth Management Group - ScotiaMcLeod Fredericton

Invest prudently, not fearfully

Canadians 50 years of age and older have about $300 billion in GICs and High Rate Savings. That’s the highest it’s been in nine years – while rates of return in these vehicles are at multi-generational lows.

$300 billion is not a number most of us can relate to so let’s put it in perspective. $300 billion is five times the wealth of one of the richest people on the planet, Warren Buffet. It’s more than the market value of Wal-Mart worldwide. It’s almost half of the total amount of the controversial US Government bailout known as TARP. It’s a lot of money.

Some investors who are now putting money in GICs and savings accounts are doing so because of concerns about the risk of investing in higher returning investments. Unfortunately a myopic view of an investment’s volatility causes people to avoid potentially higher returning investments. This exposes them to a much greater risk – the mathematical reality of running out of money in retirement.

The math is clear; the lower the return on an investment, the more money that must be saved from the investors income. If all investors earn on their retirement investments is 3%, the amount they must save for retirement goes up dramatically. By the way, the average four-year GIC rate in Canada today is 2.16% so using 3% to illustrate this is generous given where rates are at the moment.

Lets look at an example; someone 51 years old, who currently has $200,000 in retirement savings, and who plans to retire at 65 year of age with income from this source of about $2,000 per month, indexed at 2 percent for inflation to age 85.

If this investor earns 3 percent on their money, between their age 51 and 65 they must save $1,860 each month for their retirement. That’s a lot of money each month. For that person to retire at age 60 the amount they must save each month jumps to an unrealistic $3,994.

If this same investor earns 6 percent on their money, between age 51 and 65 they must contribute a more manageable $276 each month to their retirement plan. If that person wants to retire early at age 60, the monthly saving required jumps to $1,430.

If the rate of return is 7.50 percent for this same investor to retire at age 65, they already have enough saved. With additional savings of $550 each month they can stop work at age 60.

These illustrations may lead you to believe that I think GICs and high rate savings are a bad idea. To be clear, I use both vehicles regularly when investing my clients’ money. The difference is, they are used to make up a part of a diversified portfolio of investments.

Typically as one ages the amount of money allocated to less volatile (lower return) investments should increase, but rarely is it necessary or even prudent to have 100 percent of ones money in GICs and savings accounts. More often it makes sense to have some portion of ones investments placed in a vehicle that provides higher potential returns – and there is a wide range of high quality investments available to earn the 6 percent and 7.50 percent rates of return illustrated above.

Obviously investors are cautious after the events in financial markets over the past few years. Cautious and prudent investing is good, fearful investing is not. Take the time and seek the advice you need to learn how to invest prudently. It can mean the difference between a retirement goal you can achieve and one that may disappear into the mist as you experience the mathematical reality of earning too little on your money.

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.