It has been said that life is what happens while you're busy doing other things. And, in a very 'real life' way, that's true. Most of us have longer-term goals and objectives for our lives - and that usually involves accumulating enough wealth to have an enjoyable retirement.

But, keeping your eye - and investment focus - on your longer-term goals can be tough, verging on impossible when the 'mini-crises' and multitasks associated with raising a family or finding this month's mortgage payment constantly take day-to-day precedence.

That's where the life cycle approach to investing comes in. It works by letting you manage your finances so they match the circumstances and priorities of your life in its different stages while maintaining the right investment strategy to meet your long-term goals. There are three stages in the life cycle approach, each taking into account your financial needs and ability to save at that particular point in life.

The savings years (ages 25-40)
Younger people typically have higher expenses and a lower available amount to invest than more mature folks. These are usually the years when you're dealing with a home down payment, a mortgage and the many other expenses of raising a family. But, you can't afford to ignore the need to save. Money put away at this stage has longer to grow and can contribute substantially to your retirement.

That's why you should think about maximizing the growth of your tax-sheltered Registered Retirement Savings Plan (RRSP) - a tax-efficient way to build a retirement fund. This is also the stage when you can generally take more risk in your investment choices. More volatile investments like equities can produce higher returns in the long run, but have more volatility in the short run. With a long time horizon you afford to pay less attention to the ups and downs of the market.

Mutual fund investments with a strong equity component are a good way to include this high-potential long-term growth element in your portfolio while reducing the impact of volatility in individual stock prices by being well diversified.
The wealth-building years (ages 40-60)

By this life stage, your income is reaching its peak, the mortgage may be paid off and you've likely reduced or eliminated other debt. That means you'll have more capital to invest. Look first to your RRSP - at this stage it's important to make your maximum annual RRSP contributions and, if possible, make up any and all unused contribution room from previous years. With the power of compound growth, more money sooner in your RRSP can result in much more money later for retirement.

Early in this stage you should maintain a healthy proportion of growth investments in your portfolio, but as retirement nears, you may want to redirect a greater proportion of your retirement savings into lower-risk fixed-income investments, such as bond mutual funds or Guaranteed Investment Certificates (GICs).

The retirement years (ages 60 and over)
This is the stage when you'll probably need to tap into your accumulated wealth to meet retirement expenses. With the average life expectancy rising, you might need to maintain your retirement income for twenty years or more - so planning for your income needs is a priority.

During the retirement years, it's a good rule of thumb to focus on capital preservation and to gear your portfolio to less volatile investments. But, don't exclude growth investments that can add significantly to your retirement income and protect against the effects of inflation.

Each of the three stages in the life cycle approach to investing requires a different investment strategy - but one aspect should always remain constant: Diversification. A balanced and diversified investment portfolio is better able to withstand short-term market fluctuations and can still achieve the growth you need to reach your long-term goals.

A professional financial planner can give you more insight into how the life cycle approach to investing can work best for your life.   NHS


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This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact Jeff Colbourne, Investors Group Consultant at 403 220-9654. Insurance products and services distributed through I.G. Insurance Services Inc. Insurance license sponsored by The Great West Life Assurance Company.