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World Events, Retirement and Your Savings

Most young professionals (YPs) have every intention to consciously budget and wisely save our well-earned dollars, whether to ensure security for years down the road or to reward ourselves with that much-needed vacation the following month

Most young professionals (YPs) have every intention to consciously budget and wisely save our well-earned dollars, whether to ensure security for years down the road or to reward ourselves with that much-needed vacation the following month. We have come to realize, however, that unexpected situations can happen in our daily lives at any given time, throwing off our budget and savings plan. World events, too, have the potential to affect our long-term investments and potential for good returns in a time where most young professionals (YPs) are already nervous when it comes to terms once reserved for our parent’s vocabulary like RRSPs, investments and returns. The past few years have seen some pretty large-scale and devastating world events. We continue to witness ongoing uncertainty  in the news today, from the financial crises in Europe and instability in the Middle East, to the effects of recent natural disasters such as Superstorm Sandy in the U.S.

Admittedly, when you see all the political, financial and even climate instability in the world it’s very easy to think you should sell your investments or stop investing. These things can make even experienced investors apprehensive when it comes to thinking about the safety of their long-term investments and the potential for good returns. But there are strategies to consider that will protect your savings and investments over the long term as you continue to accumulate your savings so that you may one day relax and enjoy that all-encompassing retirement that you’ve earned.  

Bob Gorman, Chief Portfolio Strategist, TD Wealth, has helpful advice on how to protect your retirement portfolio and investments and offers an optimistic outlook for the year ahead.

On US stocks:

In his TD 2013 Investment Report, Gorman predicts a positive outlook for US stocks, with factors like the recovery of the housing and auto sectors, revitalization of US manufacturing, decline in daily oil consumption, reasonable valuations and an accumulative monetary policy playing a role.

 “We expect US stocks to rise for a fifth successive year in 2013 despite notable macroeconomic risks like the fiscal cliff, the new presidential term, and external risk factors from Europe, China and Iran,” said Gorman.

“We expect it to be another year in which stocks advance and outperform bonds,” Gorman continues in the report.

On emerging markets:

“Emerging markets are expected to generate respectable returns and continue recovery in 2013.”

“We expect China will orchestrate a soft landing, which is beneficial for both the global economy in general and emerging markets in particular.”

In general:

 “We anticipate large caps will again outperform small caps. We continue to favour less economically sensitive sectors and stocks with substantial and rising dividends.”

In the report, addressed challenges facing investors, particularly when it comes to retirement. After all, we are living longer. Statistics Canada data reveals that Canadians are living longer, healthier lives than ever before.

On living longer:

“In a nutshell, your portfolio will need to finance many years of active retirement. Twenty to thirty years is becoming the norm, meaning you’ll need a larger nest egg to fund this next chapter in your life,” says Gorman.

“This means that you might want to consider having a growth component in your plan, in line with your risk tolerance and objectives,” he continues. “It also means working with your portfolio manager to ensure that your investments are structured tax-efficiently so that you have more money in your hands at the end of the day.” 

On the impacts of inflation:

 “Many Canadians have benefitted from low inflation over the past decade. As measured by CPI, (Consumer Price Index), it has averaged 2% since 2000. But prices have been moving higher lately, spurred by higher energy prices,” says Gorman.

“Rising prices can eat away at the purchasing power of your savings over time. For example, Bank of Canada data shows that inflation has averaged about 2.3% annually over the past 25 years. If your investment returns did not earn at least that much, you would be falling behind – and that’s not even taking into the effect of taxes.”

“In our opinion, equities and equity mutual funds can promote the growth needed to stay ahead of inflation,” Gorman advises.

On rising healthcare costs

Gorman points to the increase in the cost of health and housing was rising faster than the CPI.

“For Canadians transitioning out of full-time employment, this takes on an even greater importance, as extended healthcare benefits, such as dental and physiotherapy, may no longer be available to them,” cautions Gorman, “You may need to plan for healthcare costs no longer offered by employment benefits.”

What you can do NOW:

Take a good look at your personal financial situation; this means your income, any credit card or student debt, your savings, investments, etc. Then, take a moment to think about your long-term financial goals and lifestyle in general – and the steps you’ll need to take to reach them.

This may seem daunting for some YPs, but you might want to consider working with a financial professional (a financial planner, investment advisor) to help you with this process. He or she can help you determine your goals and implement steps to help you achieve them.

A financial professional can also provide guidance on determining the right mix of investments for your age and risk tolerance – and that can help combat the volatility in the markets caused by world events.

Don’t forget – the RRSP deadline for your 2012 income taxes is coming up on March 1, 2013. Contributing to an RRSP is one of the most important steps you can take towards your financial future, and also offers tax benefits!

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