Life cycle investing: Cycling your way to a lifetime of financial fitness

Life cycle investing is simply a way to manage your finances so they match your financial priorities at different life stages. Retirement may still seem a long way away, but with average life expectancy rising, retirement could last for many years. That makes planning early a priority.

Life Stage One – The Savings Years (25-40)

Typically, this is a time of life when expenses are higher and the amount available to invest is lower. During these years you’re usually dealing with mortgage payments, car payments, and the many other expenses associated with raising a family.

Life cycle investing is simply a way to manage your finances so they match your financial priorities at different life stages. Retirement may still seem a long way away, but with average life expectancy rising, retirement could last for many years. That makes planning early a priority.

Despite this, it’s important to save money because the amount you put away early has longer to grow. You can maximize this growth by contributing to your Registered Retirement Savings Plan (RRSP). It’s also a time when you can take more risk in your non-registered investment choices. Because your time horizon is long, you can afford to pay less attention to market ups and downs and your investments have time to bounce back from the dips. Mutual funds with a strong equity component are a good way to diversify your portfolio by adding the high growth potential of equities while reducing the volatility associated with individual stocks.

Life Stage Two – The Wealth Building Years (40-60)

During this stage, your income is reaching its peak and your expenses (mortgage and other debt) are being reduced or eliminated. With more capital to invest, it’s an opportunity to maximize your RRSP contributions, and catch up on any unused contribution room from previous years. The power of compound growth will deliver much more money for you later in retirement. In the early years of Life Stage Two, a healthy proportion of growth investments in your portfolio is important, but as retirement nears, we’ll look at re-directing a proportion of your retirement savings into investments that carry less risk and variability, like bond mutual funds or Guaranteed Investment Certificates (GICs).

Life Stage Three – The Retirement Years (60 and over)

At this stage, you’ll likely need to tap into your accumulated wealth to meet retirement expenses. That’s why our focus will shift toward capital preservation during retirement. However, we’ll still need to include some growth investments in your portfolio to help build your retirement income and protect against inflation.

As you can see, each of the three life cycles focuses on different priorities. Through every life stage diversification is key! A balanced and diversified portfolio is the best way to withstand short-term market fluctuations and still deliver the growth you need to reach your long-term goals.

© iStockphoto.com/Doug Berry

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