When we picture retirement, we see comfort, security, and fun. It’s financial freedom, and it’s freedom from the hustle we’ve all faced in our working years.
However, there are many people who lack the proper knowledge and tools to make sure that their retirement is worry-free. If you’re one of those people, and you want to learn more, keep reading.
How much you need to retire
To decide how much you will need for your retirement is a tough nut to crack, because there are a lot of factors you must consider before settling on a number. Inflation, future medical costs, and your personal goals, among other things, contribute to how much you’ll need. Remember that whatever you need for your retirement, you’ll probably need more.
Here are a few things you’ll need to keep in mind.
1. Your retirement goals
These are your long-term financial goals. A common reason why people don’t plan for their retirement is that they do not know their level of personal finance. A good personal financial plan will help to recognize your retirement goals in order to build a strong foundation and better plan to achieve them.
Not knowing your goals makes the future more uncertain than it has to be, and uncertainty often leads to anxiety.
A good way to deal with this, or avoid it altogether, is to make a list of your retirement goals—what kind of house you want to live in, where you want to live (is it a low-cost or high-cost area?), your expect living expenses, what you’ll do with all your newfound free time, and many other things.
Getting a good handle on your retirement goals is the ultimate first step in planning for your retirement.
2. Your projected retirement income
Once you know your retirement goals, you can make the most of your retirement income sources by adjusting them to meet your goals.
Your key sources of retirement income will likely be your pension plan, your retirement savings plan (RRSP, TFSA, RDSP), and your personal savings and investments.
Selecting the right plans and investments, and maintaining them, are key to having a comfortable retirement.
3. Your projected medical expenses
Higher medical costs are an inevitable part of getting older. It’s very common for retirees to increase their spending by a lot, after spending moderately for a long time, to cover medical expenses. It’s better to plan for this inevitability early on and know that you have it covered when the time finally comes.
4. Plan for inflation
Inflation has been benchmarked at about 2%, and though this value has been relatively stable, there have been some deviations over the years. Notwithstanding, inflation takes the profitability out of long-term savings and low-yield investments, and in fact, leads to losses over the years.
High-yield investments, as well as retirement savings accounts like 401ks and IRAs, are better alternatives for the long term. When you line up your goals, your projected expenses, and income, and adjust it all for inflation, you should have a pretty solid idea of how much you’ll need to retire. Knowing this will guide you in making your retirement plan.
Read below to get more ideas of your courses of action in your retirement planning.
Saving for retirement
Starting to put money away for retirement is something you should start tackling as early as in your twenties. Starting this early makes it a lot easier, and also means that you’ll need to put less away at a time.
Of course, if you have more immediate needs, waiting until you’re in your mid to late thirties is perfectly fine, albeit a little more difficult.
Waiting longer than your thirties is also an option, but not a very good one.
It will put a lot more financial strain on you; you’ll have to put a lot more money into your retirement fund at a time than you would have had to earlier, and it will also yield less profit, as it will have less time to mature.
If you’re in your forties or fifties reading this, though, and you feel discouraged or put down by this knowledge; remember that starting your retirement saving now and getting less than you would have a decade or two ago, is far better than not starting at all and having nothing to retire with.
Creating a budget can really help with deciding how much you can afford to save per month based on your income, and how much of your savings goes into long-term (retirement) savings.
Automating your savings can also help you save consistently every month, and reduce the risk of forgetting and/or spending the money.
Choosing a retirement plan
There are different kinds of retirement plans available. Some plans are more flexible and make your funds accessible, while others are more rigid.
Choosing which one to use is a matter of your personal goals and preferences.
Here are some retirement plans and how they work.
1. Registered Retirement Savings Plans (RRSPs)
RRSPs are designed specifically to help you save up for retirement.
Depending on how much you earn and how much you put into the account, you can get a tax deduction on your contributions up to a limit; which is usually 18% of your income the previous year (or a maximum set by the Canadian Government).
You can set up an RRSP through a bank, insurance company, credit union, or a trust. You must have a social insurance number (SIN) in order to create an RRSP account.
If you’re married, you might want to set up a spousal or common-law partner RRSP to ensure that retirement income is split evenly between the two of you.
Another benefit is that if one partner earns more than the other, the higher-income partner gets higher tax deductions while the lower-income partner gets higher income during retirement.
You can also choose to set up a self-directed RRSP for a more hands-on approach in your retirement investments. However, you cannot hold RRSP investments in your own name.
Money you put in an RRSP account is not considered income as long as it stays in the account. The same goes for money earned from RRSP investments.
Withdrawals from an RRSP account, however, are considered income and are taxed.
2. Tax-Free Savings Accounts (TFSAs)
TFSAs are another type of saving account. Though they aren’t dedicated retirement saving accounts, they are often used to save towards retirement.
However, any Canadian resident over 18 years old with a SIN is eligible to open a TFSA, and will accommodate TFSA contribution room, regardless of whether they contribute to one or not.
Contribution room is the total amount you can contribute annually to a TFSA.
It is made up of three factors: the annual TFSA dollar limit ($6,000 in 2021), withdrawals made the previous year (other than withdrawals made to correct over-contribution), and unused contribution room from the previous year.
It’s important to remember that over-contribution in a year is punishable by a penalty.
There are wide range of investments available for TFSA holders, and the investments are allowed to grow tax-free.
A key difference between TFSAs and RRSPs is that withdrawals from TFSAs are tax-free. However, TFSAs are not tax deductible, and contributions are made after taxes.
3. Registered Disability Savings Plans (RDSPs)
As the name implies, RSDPs are savings plans designed for Canadians living with disabilities. Though not dedicated, they can be used to save for retirement. Any Canadian resident who has a social insurance number and is eligible for the disability tax credit can receive money from an RSDP; and anybody you give written consent to can contribute to your RSDP.
There is no limit to how much you can contribute to this plan, but there is a lifetime plan of $200,000; which includes contributions made by other people.
Like with TFSAs, RSDP contributions are not tax deductible. Withdrawals, however, are not considered income and are therfore not taxed.
Depending on a number of factors, RSDP holders may also be eligible for grants and bonds, which are separate from your $200,000 lifetime limit.
One common feature in RRSPs, TFSAs, and RSDPs is that all profit earned on money saved in these accounts is exempt from taxes. This means that the compound interest generated over time is always going to be higher, regardless of which plan you choose.
If you feel like you need help deciding which plan works best for you, you should consider seeking the assistance of a financial advisor.
Investing for retirement
Determining the proper combination of investments to make towards your retirement depends mostly on your age and on your risk tolerance.
Generally, you’ll want to make bigger, more risky investments when you’re younger, and then slow it down as you get older. In essence, your retirement investment plan grows and changes as you do.
As for the question of what to invest in, the most popular—and arguably the best—long-term investments out there are stocks and bonds.
The stock market will bring you the best long-term returns on your money, and there are quite a few ways to invest in it.
1. Mutual funds
The easiest way to invest in the stock market is to purchase mutual funds—a type of investment where your money is pooled together with lots of other investors’ money and used to invest in a group of different assets that have something in common. The assets are usually mostly, if not all stocks.
The great thing about mutual funds is that they offer diversification, which is a highly important part of investing.
However, they can’t be sold during the day, and they only get prices when the trading day is over.
2. Index funds
An index fund is a type of mutual fund that charges less than its traditional counterparts.
What an index fund does is track a market index such as NASDAQ or the S&P500, and mirror its returns.
Traditional mutual funds, on the other hand, are actively managed, and their objective is to outperform a benchmark. This means that they hire managers to pick and choose investments they think might get the fund over the predetermined benchmark.
The costs of hiring the managers, as well as other trading expenses come out of investment returns, reducing your overall profits.
Index funds, however, are automated, meaning that they can afford to charge much less in fees, therefore increasing your returns.
Another way to trade on the stock market is by using exchange-traded funds (ETFs).
Unlike index and traditional mutual funds, ETFs can be traded at any time of the day. This is because they are traded on a stock exchange. This also means that ETFs can have prices in real time, rather than at the end of the day.
The most important thing to note about ETFs in the context of your retirement portfolio is that they’re cheap, many having no management fees.
As you know, the more you can save towards your retirement, the better.
You can also purchase individual stocks, though it’s risky business if you don’t know exactly what you’re doing. Individual stocks, if done right, can be a wonderful addition to your investment portfolio, but you probably shouldn’t let them make up more than 10% of its value.
Bonds give less returns, but are more stable than stocks. The basic premise of a bond is that you give a loan to a government or company at a fixed interest rate and you get annual returns. At the end of the loan term, you get your original investment back.
There are, however, some drawbacks to investing in bonds.
While government-issued bonds practically guarantee you a certain amount of income every year, interest rates these days are so low that you might as well not be making any profit.
Company-issued bonds are not guaranteed, and companies may default. If and when they do, it can lead to irrecoverable losses.
Borrowing money to invest
If you want to make larger investments than your current budget can take, you have the option of taking a loan for the purpose of your investment, or investing on leverage.
You can get loans from either banks, online lenders, or the brokers you’re investing with.
Safeguarding your retirement funds
After you’ve put money aside for savings and completed your investment portfolio, you need to take steps to make sure you don’t have to touch those funds and that they’re allowed to grow unencumbered.
1. Paying off debt
Paying off debt is always a good step.
2. Creating an emergency fund
This is also a step in the right direction. Having money set aside for emergency situations, like health emergencies or losing your job, protects your retirement funds in the event of those things happening.
The standard rule of emergency funds is to save up enough money to take care of five to six months’ worth of necessary expenses.
3. Taking loans
Though this might sound counter-intuitive, taking a loan can actually help you save in the long term.
Rather than dipping into your retirement funds, you can take a loan from a bank or an online lender and pay it back over time.
A good example is getting a mortgage. It’s a loan, but also an investment; and it yields higher returns in the long run than the payments you make on it. Paying it off will also help increase your credit score.
Estate planning and life insurance
This part is a little off from the rest. It’s less for you in retirement, and more for your family after you’re gone.
Planning your estate, making a will, and getting life insurance are ways to make sure your loved ones are taken care of, should anything go wrong.
Remember, it’s never too early to secure your loved ones’ future.
With the right retirement plan, you can make sure you never have to worry about money in your later years.
All you have to do to create financial security for yourself is let your money work for you. With the right combination of retirement funds, savings, and investments, you can make it happen.
Remember, it’s never too early to start planning for your retirement.
In fact, it’s better to start earlier in order to build up the financial security you need.
If you’re older, however, you shouldn’t let that discourage you; with the right plan, you can still secure your future.