What's a saver to do?

by Achieva Financial
Nov November 28

Achieva Financial’s President David Mortimer shares his thoughts on money, investing, and the economy through our blog. Follow him on Twitter @MortOnFinance

When longtime savers look at today’s interest rates, it’s difficult not to feel pessimistic. 

At best, the Canadian economy is sluggish. Equity markets continue to prove volatile and interest rates have remained in this downward spiral since the financial crisis of 2009. In an effort to maintain a stable economy, the Bank of Canada (BOC) has steadily lowered its Key Overnight Rate to historical lows, which has set the stage for what Canadian financial institutions ultimately charge borrowers and pay savers.

While the merits of this monetary policy will no doubt be debated at some point in the future, it offers little relief if you’re looking towards retirement and trying to preserve and build wealth. So what can savers that want a safe haven from risk turn to?

 Here are five strategies for consideration:

  1. Time is still one of your best allies when it comes to saving or investing.
    The math is simple. Starting early, staying the course and allowing the power of compound interest to maximize your returns will help build your wealth. This applies to any stage of life, including as you approach retirement – even at today’s interest rates. Starting a savings plan now rather than deferring it five years will have a tremendous impact on what you will accumulate.

  2. Maximizing your return is far more than the interest rate you receive.
    Now more than ever is the time to make sure you’re making use of tax shelters. Yes, you should always  ensure you’re receiving the best interest rates available for your savings, however, this is only one part of maximizing your long-term returns. Tax sheltering your savings through a combination of allowable TFSA and RRSP contributions will best preserve these returns and allow them to grow faster.

  3. Hedge yourself against rising and falling interest rates.
    Rather than have all your savings in a liquid deposit account, ladder your savings across a range of GIC/Term Deposits (one through five years). Doing so, will offer you one of the best ways to earn a higher return while reducing your risk of sudden interest rate moves.   

  4. There is still no substitute for a consistent savings regime.
    The days of earning an 8% interest rate, compounded over multiple years is now folklore. Today, you need to make up this shortfall through a consistent savings plan. Whether the amount is established as a percentage of income (such as 10% to 12% of what you earn) or a consistent dollar amount (say $50 per week), reminding yourself of the “pay yourself first” philosophy will greatly assist in building your savings and wealth through the long-term. 

  5. Finally, if all else fails, you may simply need to consider whether adjusting your plans and retiring later will serve you better.
    Maintaining an income of even $12,500 a year is like receiving an annual return of 2.5% on $500,000 in savings. It may not be your ideal plan, however, there has been a steadily and growing trend of Canadians either delaying their retirement or finding part-time employment to help maintain their lifestyle and offer some needed relief to their savings.    

- Mort on Finance