my money
At a Glance
Helping You Understand Financial Planning and Investments
Don’t let “parked” RRSPs hurt your long-term savings
Take time to go back and invest strategically
The RRSP contribution deadline
has come and gone, and not only
are many Canadians recovering
from the scramble of making last
minute contributions, they’re
also trying to decide where to
invest their funds.
Although both Canadian and
world markets performed strongly
last year, if you’re like many
investors who made a last minute
RRSP contribution, you may have
“parked” it in a safe, low-yield
money market or guaranteed
fund while you decide where to
invest your contribution for the
long term.
goals, their relatively low returns
combined with the effects of
inflation does not make this an
ideal long-term strategy.
You should ensure that your
RRSP contribution is working
towards meeting your long-term
financial goals. And, for most
people, that means maintaining a
diversified portfolio that contains
at least some longer-term growth
investments.
Sounds like a reasonable strategy …
but let’s look at it more closely.
Too often, people forget to
“un-park” their funds and end up
keeping them in low-yield investments far longer than they
intended. And, while holding
cash and cash equivalents can be
useful for saving for short-term
Group retirement services are provided by Sun Life Assurance Company of Canada, a member of
the Sun Life Financial group of companies. © 2007, Sun Life Financial. All rights reserved.
Which investment mix
is right for you?
While a diversified portfolio of
stocks, bonds, and cash investments is ideal for spreading the
investment risk over many types
of investments, the weight that
you give to each type of investment will depend on your
personal situation. It is also
important to take into account
the length of time you have to
invest before you need to start
drawing on the funds and your
tolerance for the ups and downs
of the investment market.
If you haven’t already determined
the investment strategy that’s
right for you, or if it’s been a few
years since you last looked at it,
you may want to explore what
planning tools are available to you.
Check out the retirement plan
your company offers through
Sun Life Financial. You may also
want to talk to a financial planner.
Continued
☛
(cont’d)
How growth battles inflation
Financial planners are professionals who use a big-picture
approach to help you meet your
long-term life goals by examining
and exploring all your financial
needs. While you may only need
assistance on a single issue,
financial planning is always done
within the context of your overall
situation. Whatever your needs,
working with a financial planner
can be a valuable step in securing
your financial future.
Because the inflation rate has been relatively low for the last few years,
it’s easy to forget how quickly it can erode the value of your savings.
But even a low inflation rate can have a major impact over time.
You should re-evaluate your
financial profile periodically.
As your circumstances in life
change, so should your approach
to financial planning. Life events
like a marriage, divorce, a new
baby, change in employment or
serious illness can have lasting
effects on your financial plan.
Even if you aren’t experiencing
major life events, your investment strategy will gradually
change over time, especially as
you get closer to needing your
savings in retirement. Regularly
reviewing your investment mix
will ensure that you stay on track
to achieving your financial goals.
Checking up on your
current investment mix
When you are developing the
investment mix that will work for
you, you’ll need to know your
current investment mix in your
company group plan. You can
find this at Sun Life Financial’s
Plan Member Services website at
www.sunlife.ca/member.
■
Select the link under
my financial future.
■
In the Quick Links section,
select Investment Mix – Charts.
Annual inflation of two to three per cent may not sound like much, but
if you’re earning a low rate of return on money market or guaranteed
funds, that return may not be enough to counter the effects of inflation.
So what are the effects? The chart below explains the Rule of 72, which
shows how inflation can cut your buying power in half over time.
Just divide the average inflation rate into 72 to find out how many
years it takes for current prices to double.
Average
inflation rate
2%
3%
4%
5%
6%
The Rule of 72
72 ÷ 2
72 ÷ 3
72 ÷ 4
72 ÷ 5
72 ÷ 6
Years for current prices
to double
36
24
18
14.4
12
For example, if the average inflation rate is three per cent, in 24 years
that $1.00 muffin will cost you $2.00. And a $30,000 car will cost
$60,000. You get the picture – on average everything you buy will cost
you twice as much. Of course, if inflation increases, the length of time
it takes for prices to double will be even less.
If you figure you need an annual income of $40,000 in retirement
(in today’s dollars) you’ll actually need $80,000 in retirement income
to maintain your buying power if inflation causes prices to double
between now and your retirement age.
That’s why growth investments, like stocks for example, are so important.
If the annual inflation rate is three per cent, and you’re only earning three
per cent interest in a money market fund, your real return is zero per
cent per year. You’re countering the effects of inflation, but not growing
your portfolio in terms of your ultimate spending power.
Long-term success depends on diversity
The key to successful retirement savings is to stick with a long-term
investment strategy that includes investments with potentially higher
returns than cash investments. And, while cash and bonds can play an
important role in your portfolio – particularly as you get closer to
retirement – in order to increase the value of your portfolio you also
need investments that offer a higher growth potential.
i
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Services Marketing, Sun Life Financial, 225 King Street West, Toronto, ON M5V 3C5.
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