What to do with your retirement savings:
Rule #4: Invest your savings in low cost stock and bond index funds:
As hard as it is to believe, you can have the same standard of living in retirement with only 50% of your pre retirement income. Your goal now is to save enough money to hit your target retirement balance before age 65.
In order to have the save lifestyle in retirement as when you were working, you will need to:
Save 6-10% of your yearly income each and every year from age 25 to 65. No excuses!!
Let’s assume your family income is $150,000 a year, you want to save 6% of your yearly income in your retirement savings account and be completely debt free before age 65. How do you make your yearly savings grow to reach your retirement target?
The answer is low cost stock and bond index funds. According to William Bernstein, the easiest way to do this is to invest your savings in 3 simple products: (I have modified his advice for a Canadian audience)
Invest 1/3 in a low cost all Canada stock index fund
Invest 1/3 in a low cost all world stock index fund
Invest 1/3 in a low cost Canadian bond fund
Thankfully, companies likes Vanguard Canada, IShares Canada and BMO offer these low cost index funds. My personal favourite is Vanguard Canada because the company is owned by its customers so their incentive is to deliver best results to you, not to third party shareholders.
Using Vanguard products, and the example of a family earning $150,000 a year, you need to save $9000 each year (6% of $150,000). You will split that $9000 into 3 pieces of $3000 each and buy:
$3000 in Vanguard FTSE Canada All Cap Index ETF (VCN)
$3000 in Vanguard FTSE All-World ex Canada Index ETF (VXC)
$3000 in Vanguard Canadian Aggregate Bond Index ETF (VAB)
That’s it. A few minutes work, once per year and you are done.
To buy these funds, go to your bank, ask to set up a discount brokerage account, and make the purchases when you have the money. You could purchase $3000 VCN in March, $3000 VXC in August, and $3000 VAB in October. When you buy really doesn’t matter as long as you do it every year between ages 30 and 65.
As of February 2018, Vanguard has introduced a new one stop fund that includes both stocks and bonds and does the rebalancing for you. I’ve posted about it on the blog already so check it out if you’re interested. I will be recommending this new product to all my friends and family. VGRO, VBAL are the symbols.