If you are like most Canadians, the investment choices you make during your working years may have a significant impact on your retirement. But the importance of smart investing doesn’t end when you retire. In fact, post-retirement investing can have an even larger impact on your retirement well-being. There are two reasons why.
First, retirements are much longer now. Many Canadians are living well into their late 80s and 90s. At the same time, many are retiring, semi-retiring or switching to less remunerative pursuits earlier. So, those leaving full time work at age 60 or 65 must consider the potential for a retirement of 30 years or more. As a result, many will be investing for a longer time period after their retirement date than during their working years.
Second, there is more money at stake. Hopefully your nest egg will grow as you approach retirement (assuming decent market conditions). Also, at some point you may receive a large cash infusion from an inheritance, from downsizing your residence, or selling a business. Or perhaps you have an employer RRSP or other plan that may be switched at retirement to a personal RRSP, LIRA or other registered account that you manage.
Given increased longevity and relatively large portfolios, a modest increase in your investment rate of return during retirement can have a meaningful impact on financial well-being. If you are among the millions of Canadians who invest through mutual funds, your greatest opportunity to increase returns may be to reduce your costs. Consider the following simple example.
When they retire at age 60, Nicole and Michael will have accumulated a combined $1 million in their RRSPs, which are invested in balanced mutual funds. They plan to withdraw $67,000 from their RRSPs annually. Let’s assume the mutual funds will produce an average return of 6% before charges of 2.25%, thereby providing a net annual return of 3.75%. At this rate, the RRSP will last until Nicole and Michael are age 83.
If they were to switch to lower cost index ETFs, whether through the same advisor or a new one, and generate the same average 6% return before total charges of 1.25%, their net annual return would be 4.75%. This 1% extra net return would enable the couple to continue drawing $67,000 for an additional four years to age 87.
Alternatively, if Nicole and Michael were to switch to DIY investing and buy balanced ETFs which produce the same average 6% return before charges of 0.25%, their net annual return would be 5.75% giving them a total of 12 additional years of $67,000 withdrawals to age 95. In total, a 2% reduction in costs would produce about $800,000 in added lifetime income assuming the same pre-fee return.
How long will your nest egg last?
Assume a $1 million nest egg invested at age 60, earning 6% before fees with annual withdrawals of $67,000
How can you determine whether you should reduce your investment costs in order to make your nest egg last longer? First, take some time to improve your knowledge of investment basics. The industry portrays investing as mysterious and complex, but it can be quite simple. Don’t be intimidated. You might even enjoy the learning experience and the increased confidence that comes with it! There are some great online sources like OSC’s Get Smarter About Money, BCSC’s InvestRight and this publication, as well as some excellent books focused on lower cost investing (one of my favourites is John Bogle’s Little Book of Common Sense Investing).
Next, find out how much you are currently being charged for investment products and services. All forms of investment include costs, but a lack of investment industry transparency has contributed to poor investor understanding of this critical factor. This was underscored by a recently published Canadian Securities Administrators study, which found 50% of Canadian investors are unaware they are paying any fees at all! In my experience, even among investors who know they are incurring costs, very few have a sense of the total.
To determine your costs, email your advisor with the following request: “Please provide me with details of all fees/costs/charges that I am incurring including fees charged directly by your firm and any indirect costs including MERs charged by mutual funds and any other investment products in my accounts”. I highly recommend you do so even if you are confident that you already know your costs. Once you know your costs, get a sense of their long-term compound impact with a simple online tool like the InvestRight Fee Calculator or the T-Rex Score calculator (on my website).
Once you know what you’re paying, you can assess whether you are receiving enough value in return from your advisor. If so, good for you. But if not, you might consider alternatives, including lower cost traditional advisors, robo-advisors or DIY investing though index ETFs. If you choose DIY or robo investing, you could separately utilize a fee-only financial planner from time to time to provide detailed retirement and other financial advice.
Both before and during retirement, reducing your investment costs can make your precious nest egg last years longer. No matter what your age, take some time to discover if lower cost investing may be right for you. As Warren Buffett declared: “The best investment you can make is in yourself.”
Larry Bates is the author of Beat the Bank: The Canadian Guide to Simply Successful Investing. After working in the banking industry for 35 years, and with several major financial institutions in both Canada and the U.K., including as Global Head of Debt Capital Markets for RBC, he has been an independent investor advocate, author, consultant and speaker.
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