Discretionary investments - your safety net for unexpected costs

Retirement planning often involves finding a balance between maintaining a comfortable lifestyle now and securing financial stability when you retire.

However, life is unpredictable, and unexpected expenses can arise.

To safeguard your financial future and maintain your desired standard of living, it is crucial to also have some discretionary investments.

What are discretionary investments?

Discretionary investments are investments that give you the flexibility and liquidity to use them should you decide to do so. Your retirement savings offer you less access, as they are mostly tied up until you retire, even with the new two-pot retirement system. Discretionary investments should be used to supplement your retirement savings, serving as one component of your overall financial strategy.

You should provide for unexpected expenses by way of an emergency fund that should be accessible immediately – at least within 48 hours – as is the case with savings in a bank savings account.

Discretionary investments can be invested with a longer time horizon too and this means it may take a bit longer to access, typically a minimum of three days, depending on where you decide to invest.

Why discretionary investments matter

Here are a few reasons why discretionary investments may play a valuable role in your financial life:

1. Unexpected expenses: Life is full of surprises. Medical emergencies, natural disasters or family crises can arise, requiring significant financial resources possibly beyond your emergency savings. Discretionary investments can act as a buffer, preventing you from dipping into your retirement savings.
2. Maintaining lifestyle: Your lifestyle may include travel, hobbies, or social activities. Discretionary investments ensure you have the funds to enjoy these aspects of life without compromising your retirement savings. Your discretionary investments can even be linked to your financial goals such as those for travel or buying a new car or taking a sabbatical.
3. Financial flexibility: Discretionary investments provide flexibility, allowing you to seize opportunities or adjust to changing circumstances. For example, if you want to start a small business or invest in a real estate venture, having discretionary funds can make this possible.
4. Peace of mind: Knowing you have a financial safety net can reduce stress and provide peace of mind. Having discretionary investments in addition to your retirement savings when you reach retirement allows you to enjoy retirement without constantly worrying about unexpected costs that could arise.

The help of an experienced and qualified financial planner can be invaluable to help you set up discretionary savings. A good adviser will guide you to consider expenses you may not have thought of and incorporate them into your overall financial plan.

A financial planner can help you match your planned expenses to rough timelines and then invest your discretionary savings appropriately.

Discretionary savings give you the ability to cover expenses such as medical costs, special education needs or attending a wedding overseas, without raiding your retirement savings.

It is crucial to build up discretionary savings before you retire too, so you don't end up in retirement with all your savings tied up in an annuity and dependent on drawing a lump sum from these funds, which could be taxed.

Making provision for both planned and unplanned discretionary expenses throughout your lifetime is key to balancing your savings, investments, and any lump sum you withdraw at retirement with your ongoing need to replace your income after retirement.

How to allocate your investments

The appropriate allocation of your discretionary investments depends on a few factors including, your individual circumstances, your tolerance for risk and whether you specify financial goals with specific deadlines or are setting savings aside for the unplanned expenses on rough timelines. Consider the following factors:

1. Set goals: Define what you want to achieve with your discretionary investments. This will guide your investment strategy.
2. Assess your risk tolerance: Determine your comfort level with investment risk. This will help you select the appropriate asset classes for your financial portfolio.
3. Diversify your portfolio: Spread your investments across different asset classes to manage risk.
4. Regularly review and adjust: Monitor your investments and adjust these as needed to align with your changing goals and circumstances.

You can consider using a tax-free savings account (TFSA) for your discretionary savings as these investments are readily accessible.

However, as there are limits on how much you can save in these vehicles and you cannot replace what you withdraw, it is generally advisable to access other savings and investments first before tapping into your TFSA.

Allowing savings in a TFSA to grow tax free alongside your retirement savings can help significantly with your discretionary needs in retirement.

By incorporating discretionary investments into your financial plan, you can create a more robust and resilient financial future. Not only will you be better prepared for unexpected expenses, but you'll also have the freedom to enjoy life to the fullest.