There is a big difference in investing strategies if you are “saving to save” as opposed to “saving to spend.”
Picture this: you are ten years away from retirement and have been presented with two options for your retirement-savings vehicle. Option 1 will pay you a modest 3% annual return, but it is completely inaccessible until retirement. Option 2 will pay you a 6% annual return, double that of Option 1, and it can be accessed at any time. For the purposes of this example, let’s ignore the tax implications of the two options outlined above. Lastly, let’s assume you are to put the same amount of money into each option over the same ten year period.
Which option will likely have more in it at time of retirement? The answer, quite commonly, is Option 1. Here is why:
Having an investment vehicle that is completely inaccessible has a higher likelihood of remaining intact than Option 2, which is fully accessible. With Option 2, you have the freedom to dip into it at any time, for any purpose, such as emergencies, vacations, new car, etc. Keep in mind, the purpose of this investment account is for retirement, not for the rainy day fund or any other matter. While it is important to have savings for those aforementioned occurrences, that should be accounted for completely separately from something such as your retirement fund.
This ties into one of the fundamental questions we ask our clients: “are you saving to save, or are you saving to spend?”
There is nothing wrong with “saving to spend,” but often times people will not have clarity on the difference and how it impacts them. This exercise is designed to get to the true purpose of their investment/savings goals, and what the desired outcome looks like. Furthermore, it can help lend guidance to which registered accounts (TFSA, RRSP) are more suited for them, their time horizon, and other pertinent information.
Contact Jeff Graham at (604) 363-7549 or jeff@firstoakfinancial.ca for an investment analysis.
DISCLAIMER: this commentary is provided for general informational purposes only and does not constitute financial, insurance, investment, tax, legal or accounting advice.