Life Happens: Goals-based Investing

While many healthy boomers are choosing to delay retirement, most will turn to their nest egg at some point to fund their lifestyle needs. In fact, one’s nest egg, or “income assets”, wisely invested, can be used to provide income replacement at any point in life; through a period of unemployment, illness, sabbatical, a return to university, or career transition. We build assets when we have enough income from other sources, then draw on those assets to replace income later. Building and harvesting our income assets strategically, has come to be known as “goals-based investing”.

The key is starting early, saving regularly, investing wisely, and doing so within a financial life-planning framework that optimizes taxes both in the accumulation and decumulation phases.


Will My House Be Enough?

The first, and often only, significant asset many Canadians accumulate is in real estate. Historically this investment has served us well, offering substantial rates of return in certain regions and significant tax advantages on the principal residence. For many, when partially or wholly liquidated, this asset is the key source of retirement income later in life. Diversification beyond real estate is important, however, when building our income assets, as real-estate prices are cyclical and generating liquidity can be costly if forced to do so at an inopportune time.

Investment and financial planning professionals will encourage additional savings and investments in a variety of account types – some tax-sheltered, some not — to take advantage of current tax deductions, long-term compounding opportunities, and tax advantaged income generation where possible. A Registered Retirement Savings Plan (RRSP), for example, is designed for long-term tax-free compounding, but withdrawals are fully taxed in the year taken.  A Tax-free Savings Account, by contrast, allows you to save and withdraw without tax penalty, but provides no tax deduction today. A taxable investment account is taxed each year based on the kind of investments it holds.

When establishing your account structure, you will be asked about your investment goals because this determines how much income you are going to need and when. You may have multiple goals, with a different savings and investment strategy for each. You will be asked about your time horizon – which is the length of time until you need the money earmarked for that particular goal. You will also be asked about your risk tolerance, a major factor in determining what type of investments are suitable for you across all your goals.


Where to Invest for Income: A Total Return Approach

Bottom line: any asset can provide you with cash flow or “income” when needed. Investment portfolios are usually designed to ensure your near-term income needs are invested in assets which won’t fluctuate greatly in value, while putting longer-term assets to work in more growth-oriented investments.

How long your nest-egg lasts will depend primarily on how it is invested. Left in cash, you are essentially just drawing on your own capital. Bonds, issued by governments and corporations, generate regular coupon payments but are not attractive in today’s low interest rate environment. Dividend paying stocks offer some income today and potential for long-term growth, but are equity investments, which means they fluctuate in value. Growth stocks offer the best long-term return potential, which means more assets to draw on one day, but may not be suitable for those with low risk tolerance or a short time horizon to their goal. Alternative investments, like real estate and commodities, may also have a role to play in portfolio diversification, but can be illiquid and volatile at times. In most cases, a combination of investments is best. The income you need can then be drawn from the total return of the portfolio across all investments, incorporating the most tax-efficient harvesting of available return across your different account types.


Planning is Power

With increased life expectancy, many investors are looking to their portfolio to sustain them for two decades or more in retirement, potentially a third of their life span. In many cases, this lengthy time horizon suggests some portion of the portfolio should be invested for long-term growth, unless the investor has substantial funds and is comfortable drawing down capital until depleted. Dipping into the portfolio sooner to fund other shorter-term goals will obviously impact the amount of capital available to fund retirement but is feasible if your dynamic financial life strategy and investment strategy is mapped out early and revisited regularly. Many financial professionals now use planning tools which allow for interactive scenario analysis, assess the feasibility of achieving your goals and whether your plan is on track.

The sooner you get started, the more options you will have.

Robyn has more than 30 years of experience building portfolio solutions that meet clients’ financial goals. She is a Chartered Financial Analyst (CFA), Chartered Investment Manager, Certified Financial Planner (CFP), and Fellow of the Canadian Securities Institute (FSCI). Robyn is passionate about helping others be financially successful and empowering them to control their financial futures because, “money facilitates peace of mind and the freedom to choose.”