An accumulation plan offers investors a way to afford their long-term financial goals, like retirement, through saving and investing. In essence, it’s a path to building the value of your portfolio. But how does it work? And how can you start using an accumulation plan today? Read on for the answers to these questions, so you can create the future you want your way.
What is an accumulation plan and why is it important?
An accumulation plan comprises investment strategies that you can put in place to grow your savings over time, usually with a specific goal in mind, such as retirement. Other long-term goals could include buying a home or your child’s education. The growth is achieved by making consistent and recurring pre-authorized contributions to your investment portfolio over a long time. This is important because investors who do not have a large sum to invest upfront can instead put a fixed, budgeted amount aside each month for investment.
Accumulation strategies can also help fuel other retirement strategies. For instance, in later phases, you may want to put an accumulation strategy in place for your minimum Registered Retirement Income Fund (RRIF) withdrawals, if you don’t need them to maximize your estate.
Behind every accumulation plan is the notion that a sum of money is worth more now than the same sum of money in the future. For example, what you’ve saved is more valuable now than it would be in a year’s time. This is because you will have lost, in a year’s time, a year’s worth of investing opportunities that could have built on the current value of your savings. Known as the time value of money (TVM), or present discounted value, this idea illustrates the pressures that weigh on investors as they plan to accumulate their savings to achieve their financial goals.
How do accumulation strategies work?
Accumulation strategies help you achieve your long-term financial goals through a variety of investment strategies that include dollar-cost averaging, tax-deferred growth, and compound interest. Here’s an overview:
Dollar-Cost Averaging
Dollar-cost averaging occurs as a result of making regular, recurring contributions of the same amount to a mutual fund or similar investment. When prices for mutual funds are high, you’ll buy fewer units. When prices are lower, you’ll buy more.
Over time, as more money is contributed, the average cost of each unit purchased is lowered. This saves you more money than simply “buying the dip” and takes the guesswork out of timing the market. It can even help you insulate your savings from the damaging effects of short-term volatility.
Tax-Advantaged Accounts
Dollar-cost averaging can be used to accumulate wealth in a variety of “registered,” or tax-advantaged accounts that allow your money to compound. These include:
- Tax-Free Savings Accounts (TFSAs): This account type lets you contribute qualifying amounts and invest them without having to pay income tax on what you earn.
- Registered Retirement Savings Plans (RRSPs), or tax-deferred accounts: These let you contribute and invest qualifying amounts, with income taxes being paid only on withdrawals.
- In either case, there are plenty of opportunities for investors to reach long-term financial goals without having to worry about the tax implications that come with using “non-registered” accounts without tax benefits.
Compound Interest
One of the biggest advantages of a smart accumulation plan is that saving through regular contributions over time gives you the benefit of compound interest—where you earn returns on your initial investment and then earn a return on your returns. That means if you invest $100 every two weeks into a balanced investment, assuming a consistent 5% return, your investment could grow to over $14,000 in just five years. When taking advantage of compound interest, the goal is to keep the funds invested and to reinvest residual income and any capital gains so your savings can continue to offer returns for as long as possible.
What are the different accumulation strategies I can use?
You’re likely to first become acquainted with accumulation strategies through your workplace’s pension plans. Of these, the three most common are known as defined benefit plans, defined contribution plans, and group RRSPs.
Here’s a quick understanding of each. Defined benefit plans pay out pre-determined amounts, typically as recurring income, when you retire. Defined contribution plans allow the employee to build retirement savings the way you want, with a selection of securities and other investments available to you. Your employer might also offer a group RRSP, which works like a normal RRSP but is fee-based and managed by the company.
However, the range of accumulation strategies you can use extends beyond workplace pensions and building your portfolio through long-term investment strategies mentioned above that include dollar-cost averaging and tax-deferred growth accounts. Like millions of other Canadians, you can also accumulate retirement savings with the help of other financial strategies like real estate investments. This can sometimes mean buying a home and paying down your mortgage which is referred to as direct ownership. This strategy is the most popular way real estate is used for building wealth.
If you want to further participate in the property market to accumulate wealth and don’t want the burden of managing properties yourself, you can invest in Real Estate Funds, which include real estate investment trusts—or REITs. As investments, REITs are more “liquid” than physical property, which means they are easier to buy and sell.
How do I know which strategies will work for me?
Deciding which accumulation strategies make the most sense for you and your long-term goals may take some thought. The appropriate choices can be affected by your taxable income, employment status—including whether you work for yourself, someone else, or in a partnership—and your time horizons.
By nature, accumulation strategies are a long game, growing steadily and taking advantage of compounding returns during the first part of the accumulation phase, and perhaps they become more proactive in a later phase, as you near retirement or another long-term goal. For instance, what if you’re already close to retirement? Should you invest the money you made in more aggressive outlets like REITs? Both sides of the strategy offer their own unique advantages but come with risks, too. Our advisors can help you navigate these and other choices with personalized advice.
When you’re a Coast Capital member, we’re with you every step of the way because your success is our success. We deeply value real human connection and that’s why, for over 80 years, we’ve been a trusted partner for our members. The more we understand you personally, the better we can help you create the real life you want today.
To learn more about how accumulation strategies can help you achieve your long-term goals, book an appointment online at coastcapitalsavings.com/contact, visit a Coast Capital branch, or call 1.888.517.7000.
This article is provided for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, fees, and other investment factors is subject to change without notice and Cost Capital Savings Federal Credit Union is not responsible for updating this information. All third-party sources are believed to be accurate and reliable as of the date of publication and Coast Capital Savings Federal Credit Union does not guarantee the accuracy or reliability of such sources. Readers should consult their own professional advisor for specific financial, investment, and tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
