There is no single way to plan for your retirement as it all depends on your finances, goals and how you would like your retirement to look. This is why every financial advisor will give you a different view or opinion about planning for retirement. Financial planning, at its very core, is all about ensuring you have the finances to cater to all your expenses and goals during your golden years. In this article, we will take a generalised look at when and how to start planning for retirement in Canada.
Everyone is encouraged to start saving as soon as they start working. Doing this allows you to get a head start on growing your retirement funds, save less every month, and reduces the pressure to cut down on too much in your life to meet your goals.
Saving early also allows you to start taking advantage of the power of compounded interest earlier. Due to compounded interest, you can save for fewer years in your 20s and still end up with a lot more money than if you saved for the same number of years when you start when you are older. A 10-year difference can make a difference of as much as $100,000 in the amount you retire with, assuming savings of $2500 per year and an annual return of 7%.
Now that you know why it is important to start saving early, how do you put your retirement plan in place? Start by thinking about your retirement goals. How do you want to spend your golden years? The retirement amount to aim for will be vastly different depending on whether you would like to spend your retirement at home with family or you’d like to travel the world.
A lot of Canadians are ditching the idea of traditional retirement and instead choosing one that is full of fun, travel, adventure and new hobbies. So, think about when you would like to retire, the financial commitments you will have when you do, as well as any financial support you will be offering your family.
Next, take stock of your spending. Think about how much you are spending right now and how much you will get when you retire. For most people, the amount they need for their retirement is 70-80% of what they need while working. Making a budget before you retire will help you figure out how much you need to save as well as the types of investments to make.
Once you know how much you need monthly once you retire, cut down on other financial commitments as soon as you can. Try to pay off your debts so you do not have to think about them once you are retired. For this, you can talk to a financial planner so they can advise you on the best debt consolidation and repayment options and strategies, refinancing options, debt reconciliation loans and other options to help you out. Additionally, have a plan in place on how you are going to repay your mortgage.
You also need to plan for unexpected costs. You will likely have unexpected expenses once you retire. Setting aside some money for such emergencies is a wise move. Also, try to get life or medical insurance as soon as you can. These can help pay for illnesses and conditions that come with old age without impacting your monthly or annual financial requirements. For other emergencies and expenses, have about 3-6 months of living expenses set aside.
Lastly, get in touch with a financial planner. The financial planner will help you set up a retirement plan that works best for you and your goals. They can help you restructure your plans or modify your savings and investment plans to ensure you have adequate funds for your retirement.
When you talk to your financial advisor, they will likely discuss the different ways that Canadians can save for retirement with you. Below, we will look at what these retirement savings options are.
Registered Retirement Savings Plan (RRSP)
Contributing to your RRSP remains one of the best and most popular ways for Canadians to save for retirement. An RRSP affords you a lot of benefits, most notably deferred taxes when saving, with tax only applying when you withdraw your funds after retirement. Once you file your tax return, the government gives you an RRSP contribution limit. You can save this amount in the current year or carry it over to the next year when you may be able to save more based on your income.
RRSPs are favoured because contributing to them can help reduce your income tax while allowing your money to grow without being taxed.
Tax-Free Savings Account (TFSA):
These accounts are available to Canadians over 18 years old. They allow you to save or invest depending on your preferences. These accounts are similar to the savings accounts you would get with a bank account, but they are different in that they also let you hold various investment products within them. The amount you save in your tax-free savings account is not taxed, but there is a limit to how much you can save into the account. Some financial advisors say that this is the best savings account, especially for those who want to start saving early.
Company Pension Plans
Lots of companies in Canada have pension retirement plans and if yours does, you should take advantage of them as soon as you can. If your company does not have any such pension plans, ask if they have a matching RRSP or TFSA program. Your employer matches the amount you put into these matching accounts and everyone is advised to take advantage of them because the matched amount is free money.
Apart from TFSA and RRSPs, there are additional options for saving and making money for retirement. These accounts help you invest in different types of products including stocks, mutual funds, Exchange Traded Funds (EFTs), stocks and a lot more. There are different Canadian trading platforms to help you invest in these products. Each of these platforms comes with its features as pros and cons.
To help you choose among the main Canadian trading platforms, Wealthsimple has an extensive guide on the different trading platforms you can look into in Canada. WealthSimple explains everything you need to know about these platforms including how they make money, which platforms are the best and why, how to use these trading platforms and more. WealthSimple also lets you open different types of retirement accounts with them and they also provide different trading tools for those who would like to manage and grow their money for their retirement.
When you use the above options to save for your retirement, you can expect a certain amount every month or year from these options. However, depending on your lifestyle and your needs, these funds may not be enough due to various reasons. This is why you should have a strategy to help supplement your retirement income, before and after retirement.
Although this might not be the best option for those who would like to retire early and enjoy their lives, it is a great option for those who would like to boost their retirement income. Staying employed, either full-time or part-time, can help boost your pension fund. Also, your Canadian Pension Plan (CPP) benefits increase every year that you continue working after retirement. These benefits apply up to the age of 70.
Increase Your Savings
If you still have a few years left before retirement, you can try to increase your savings. Remember that the higher the amount you have in your savings account, the larger the interest this money accrues. You can also decide to invest the extra cash instead of putting it into a savings account depending on the returns and your preferences. Remember that this strategy works best the further away you are from retirement.
Cut Your Debts and Realign Your Spending
Cutting debt can help you have a lot more money to save before your retirement but can also come in handy once you are retired. With a limited amount to spend, you might not have enough left over to splash on a lavish lifestyle. If you have already paid off your debts and have a lower monthly spend limit, then you will find the amount you receive from the various sources of income you have to be adequate.
Modify Your Investments
When you are far away for retirement, you have a lot of space to maneuver which allows you to invest in riskier options. However, as you need retirement, you should consider conservative investments. Although these might have a lower return, they are often less risky meaning that their returns are somewhat guaranteed. As you near retirement, have a look at your investment portfolio and readjust it accordingly.
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