As the editor and publisher of Dave Paterson’s Top Funds Report, I get many investment-related questions. But there are two questions readers ask most often: Am I putting away enough for retirement? What is the best possible portfolio for me to invest in?
In general, many experts will tell you that you should be putting away 10 percent of your income in savings. Most people work toward being able to have enough investment income in retirement to replace about 70 percent of pre-retirement income. But these are just general rules of thumb, and your particular situation may be much different.
Whether you are putting enough away will depend on a number of factors. These factors include your current income, how long you have to save, and what your other sources of retirement income will be.
How Much to Save
Typically, the lower your income, the more of it you will have to save to provide for your retirement. However, you may still have many years before you will need to draw on your savings for income. This is helpful because through the power of compounding, your early savings will be growing much faster by the time you hit your mid-50s compared with somebody who started much later in life.
A final consideration is with your other sources of retirement income. If you are lucky enough to have an employer-sponsored defined-benefit pension plan, then you may want to consider adjusting your savings rate. But if you’re like the rest of us, with either no pension or a defined contribution plan, you are more exposed to the market fluctuations. In that case, you might consider a savings rate of 10 percent of income or more.
There are a number of free retirement calculators available online. Most of the banks have one on their website, as do many of the mutual fund companies. Play around with a few of them and see how your situation looks.
Building a Portfolio
With respect to building the “best” portfolio, again, it is very difficult to say. In general, focus on a diversified portfolio made up of a mix of mutual funds and ETFs.
Generally, a person with a higher risk tolerance and a long-term time horizon would fit into the growth or even aggressive growth category. For a growth-oriented asset mix, a typical split would be between 70 percent and 80 percent in equities with the balance in fixed income. Within the equity category, the exposure should not only be to Canada, but also to global equities.
Those who want to get a bit fancy could add in some small-cap and some sector exposure. I would limit the exposure to small caps and sectors to about a third of the total equity exposure.
Within the fixed-income portion, about half should be invested in traditional investment-grade bonds, with the balance split in a mix of more tactical bond investments such as global bonds, high yield bonds, floating rate bonds, and perhaps inflation-protected bonds.
Over the long term, this type of an asset mix would be expected to generate a return that is slightly lower than what you would earn in a pure equity portfolio, but with a much lower level of volatility. Again, everyone’s situation is different, and you will want to look at your own specific needs, objectives, and risk tolerance before making any investment decisions.
Courtesy Fundata Canada Inc. © 2014. Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc. This article is not intended as personalized advice. Investments mentioned are not guaranteed and carry risk of loss.
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