Kelley Keehn, award-winning personal finance educator and author of 11 books on personal finance and fraud protection, answers CIBC's questions.
1. What’s one area where you think Canadians are missing out on a financial benefit?
Kelley Keehn: Canadians are really missing out on what's called a Group RRSP, or registered retirement savings plan. It's estimated that $3 billion Opens in a new window. is left on the table every year in Canada because employees don't take advantage of matching programs at work.
What's the long-term cost of missing out on the match?
K.K.: There's a financial cost and potentially an emotional cost as well. You may not retire at the time that you planned or you may not retire with the lifestyle you want.
2. In your books, you discuss viewing your career as an asset class. Can you elaborate?
K.K.: In Canada, the average income is $50,000. Over the course of an average career, that's more than $2 million. There's no investment that's going to return that to you.
Take a professor with tenure who has a safe, secure job. When you look at investments, that person is also likely going to be more risk-averse and more conservative. They should be talking to their advisor or planner about whether it might make more sense to take a little more risk. An entrepreneur who’s risky by nature, on the other hand, is probably going to be more risky with their investments. If they looked at the whole pie and considered their career or business as an asset, they may consider being more conservative in their investment choices.
How do they strike the right balance with their portfolio asset allocation?
K.K.: Most people aren't aware of what an asset mix is, why it matters or what to do about it. You have cash, fixed income, bonds and stocks or equity. The lowest risk also has the lowest return. Getting that mix right is crucial. You need to educate yourself or have someone like an advisor help you.
Can someone's tolerance to risk change?
K.K.: When the markets are doing well, everyone has an appetite for risk, and when the markets aren't doing well, that changes. Risk tolerance shouldn't change because of the market, it should change because you're nearing retirement or you experience a life change.
People often avoid risk for fear of losing money. But could too little risk mean you don't meet your goals?
K.K.: There’s that possibility. You should talk to your advisor about both your comfort level and your risk profile (what the numbers say you can handle for risk); oftentimes, they’re slightly different. You have to gradually get comfortable with risk, as opposed to not taking any risk at all, because you could be missing the opportunity to earn higher returns.
How important is it to take in the whole picture, beyond just risk?
K.K.: Very. It's important to have an overarching plan that takes into account retirement, as well as the other moving parts of your financial life. You have to look holistically at things like your spouse's investments and taxation issues because it's not just about the future, it's about right now. Ask yourself the big questions like where’s all of your money, what’s your overall risk profile and how does that work for you?
3. If one partner stops working to care for young children or aging parents, how does that affect a couple's financial plan?
K.K.: Being a caregiver, there's a good chance you're going to see a big gap in your ability to save and plan for retirement. It's important to ensure your good actions to save for retirement — saving in an RRSP, for example — are preserved if you're taking time away from work temporarily. For instance, you may need to adjust your financial plan for the near and long term by reviewing your budget and ensuring you have appropriate emergency savings in place for unexpected expenses. And of course, you need to consider how taking time away from work impacts your ability to contribute to your retirement account.
4. Can you get a later start on retirement planning?
K.K.: Everyone says get started young because you've got compound interest on your side, but in reality, life is expensive. People have student loans to pay off, or they're trying to buy a home. Hopefully as you get older, [you] have a higher income because you're further along in your career, meaning there's more money to put away for the future.
In Canada, you're allowed to contribute to an RRSP each year, based on your earned income. There's over $1 trillion in unused room in RRSPs that people aren't utilizing. If you don't have the money to take advantage of the annual contribution limit, it keeps accumulating. So you can make a bigger contribution later.
5. How do you choose an advisor to work with?
K.K.: Choosing an advisor means asking the right questions, such as what type of clients they work with, what they're licensed to sell, what fees they charge and how they're paid, how they're licensed and regulated and how many years they've been in business. A lot of people are intimidated to ask these questions, but it's important to have a discussion with the person you're dealing with and feel comfortable with the person providing you advice.