Amidst busy lives and schedules, the feeling of being short on time is a common one for many. And with many more immediate responsibilities to focus on, maximizing your savings and actively planning for your financial future can fall by the wayside.
While the majority of Canadians have good intentions to save early and to build their retirement savings—and 2016 Census data shows that about 65 percent of people are saving for retirement to some degree1—many don’t have a clear idea of the types of investments to consider. Studies also indicate that almost one-third of Canadians over age 50 feel they aren’t adequately prepared financially for retirement,2 and a recent RBC survey found that among Canadians nearing or in retirement, 62 percent are worried about outliving their retirement savings and almost half are concerned they can’t afford the retirement lifestyle they want.3
From these statistics, there are two important takeaway messages:
- Starting early and turning a dedicated focus to retirement savings can be very beneficial in helping to ensure you have the appropriate financial resources when the time comes, which is critically important given factors such as the rising costs of healthcare and longer life expectancies in Canada.
- Finding the right investment approach for yourself is crucial, not only to help maximize your savings, but also because it can offer greater peace of mind in investing for the future.
Choosing the right investment approach
When it comes to investing and the investing process as a whole, it should always start with determining your investor profile. Once you know what kind of investor you are, it’s just as important to think about the amount of time you have or are willing to actively spend on this area of wealth planning. Depending on personal circumstances, a challenge may be the time-consuming nature of continually trying to strike the right balance between risk and growth potential in your investments in the most effective and time-efficient way.
In considering your investment approach as part of your overall retirement savings plan, target-date funds may be a convenient and beneficial solution to consider, as they’re designed to offer a high level of convenience.
What are “target-date” funds?
Target-date funds are managed to a specific time horizon. What makes them an appealing option is that you only have to choose the fund with the target-date that best aligns with your approximate or projected retirement year, and the asset mix changes over time to help take you to, and through, your retirement goals.
“In general, target-date solutions have a positive effect on people’s relationship with their retirement savings,” notes Robin Quelhas, VP, Retirement Strategy & Portfolio Solutions, RBC Global Asset Management. “Because an investor’s retirement date is a focal point in the decision-making process, individuals are typically more comfortable with the long-term nature of these investments and it can help some in overcoming the uncertainty that can arise with market volatility.”
The structure and design of this type of retirement solution also means that the funds are rebalanced on an ongoing basis, with a focus on reducing risk as the target-date approaches. This can effectively decrease the need to monitor your portfolio and to make timing or risk reduction decisions yourself. As Quelhas explains, “When you commit to the established time horizon, you gain the incremental peace of mind that comes from knowing that your portfolio is always tracking towards your retirement goals.”
Three key features of this type of retirement savings solution:
- Diversifies your investment holdings
- Simplifies your choices
- Better manages volatility risk
Customizing for your timeline
As a specific target-date retirement solution, the RBC Retirement Portfolios have been designed based on the premise that the potential for capital growth is important along the entire retirement timeline. There are currently seven different retirement portfolios to choose from, based on varying time horizons, to meet the needs of individuals at different life stages over the course of their investing lifetime. (There’s also the RBC Retirement Income Solution for those who are approaching or already in retirement.)
For each portfolio, as it tracks along the timeline towards the target maturity date, the fund gradually shifts its asset mix, starting with an initial phase of slowly increasing equity exposure, then for the bulk of an individual’s working years, up to about 10 years before retirement, the primary focus is on equities. Then, it gradually shifts from an emphasis on equity funds to more weight on fixed-income funds to preserve capital into and through retirement.
Lower equity weight as an investor starts saving for retirement balances the need for growth with the need to manage volatility expectations in the early years.
A long period at the timeline’s maximum equity weight maintains the growth potential of the portfolio during the investor’s peak earning and contributing years.
An increased focus on de-risking offers a flexible cash flow stream as investors approach and progress through retirement.
Ten years after retirement, the asset mix stabilizes in the RBC Retirement Income Solution, focusing on income-producing equities and fixed-income securities to help generate flexible tax-efficient cash flow.
Our investment team continuously monitors equity markets all along the retirement timeline using a variety of proprietary valuation models, and increases or decreases the equity weight accordingly.
*For illustrative purposes only. Target allocation of the Fund may vary in accordance with the targets outlined in the prospectus.
“This retirement solution draws on both our 30-plus years of asset allocation experience and investor behaviour research that we think will benefit investors, particularly in the early years,” notes Quelhas. “One significant difference between the RBC Retirement Portfolios and other target programs is that in the early days of the retirement savings timeline, the equity weight is relatively low. The first few years of retirement savings are typically when investors are at their most vulnerable, confidence-wise. This approach can help individuals learn their way into the market and build comfort with volatility, especially if they happen to enter the market at a volatile time.”
Another key feature is that this type of retirement solution takes you not only up to that retirement date, but through your retirement as well. As Quelhas explains, “The first 10 years of retirement are typically the most uncertain ones as individuals make the transition, and they often need to make adjustments to their initial plans or the amount of cash flow they need. By taking the first 10 years of retirement to slowly continue on the path to risk reduction, investors benefit from the slightly higher growth potential of the funds as they make the transition from saving to generating cash flow from their investments.”
Removing investment guesswork
With a target-date fund such as one of the RBC Retirement Portfolios, individuals select the date, and then from there, an experienced portfolio management team continually works at optimizing the portfolio on an ongoing basis.
“Beyond the gradual reduction in equity exposure after that initial five-year period, the composition of the portfolio is changing below the surface. While the equity weight may be constant for a number of years, there is a gradual migration from more growth-oriented equities to more income-focused and low-volatility solutions. The same can be said for the fixed-income component, as the allocation shifts from more global and high-yield underlying funds to a higher portion of domestic and shorter-term solutions.” Quelhas notes.
Giving thought to your time horizon
Regardless of whether your time horizon to retirement is longer or shorter overall, identifying a target year or general estimate as to when you envision yourself retiring is an important first step. Once that aspect is more clearly outlined, the next focus should be on determining the most ideal type of investment approach or solution based on that timeline. “People often make a decision about when to retire in their minds but don’t connect that to their investments in a practical way, and committing to that time horizon can be a key piece of their retirement puzzle,” shares Quelhas.
Over the years, as your individual retirement journey potentially shifts or your circumstances or objectives change with shifting financial priorities, it can sometimes be difficult to manage progress towards your retirement goals. Solutions such as target-date funds may help in ensuring you’re optimally invested for growing your savings and for spending in retirement, at the same time saving you time in your overall planning.
The information provided is not intended to provide specific financial, investment or income tax advice and should not be relied upon in that regard. Please consult your qualified advisor and read the prospectus or Fund Facts document before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Funds are offered by RBC Global Asset Management Inc. and distributed through authorized dealers.
- “Household contribution rates for selected registered savings accounts,” Census in Brief. Statistics Canada. Release date: September 13, 2017. https://www12.statcan.gc.ca/census-recensement/2016/as-sa/98-200-x/2016013/98-200-x2016013-eng.cfm.
- “Retirement Readiness: Canadians 50+,” Innovative Research Group, Ontario Securities Commission. September 2016.
- “Nearly half of Canadians Are Worried They Won’t Have Enough Money to Live a Full Lifestyle in Retirement.” RBC News Release, January 23, 2018.