Preparing for retirement
Find the answers to your questions about retirement planning and check out some tips on maximizing your retirement savings.
Why should you start saving early for your retirement?
It means you won't have to tighten your belt later!
Retirement feels really far away when you're 20 (or 30, or even 40). But if you ask a retired person, they'll likely tell you that it goes by more quickly than you'd think. Starting early gives you more time to put money aside. This means your savings will have less of an impact on your budget.
Here's an example: Alain and Brenda each want to set aside $10,000. Alain is giving himself 5 years to reach his goal. That means he'll need to save $2,000 a year. Since Brenda is giving herself 20 years, she only need to save $500 a year. That means it'll be much easier for her. (Good job, Brenda!)
More time, higher returns
Pro tip: Starting early not only lets you save for longer, it also
allows you to benefit from the magic of compounded yield. That means
the yield you earn on your savings will earn you even more yield!
Isn't that great? Here's an example to make you want to start saving!
To have the same amount of money at age 65 (with the same
investments), we estimate that:
Alain, who started saving at age 50, will have to save a little over 50% of his income.
Chantal, who started saving at age 40, will have to save around 27% of her income.
Brenda, who started saving at age 30, will have to save around 18% of her income.
Young people benefit from higher risk tolerance
You can usually afford to take more risks with your investments when you're younger. Why would you want to? Because higher risk often leads to higher returns! A few key points:
- Losses often even out over time ( a bad year in the stock market can be followed by a good year).
- As you get older, you'll want to protect your assets since you won't have the luxury of waiting to reabsorb your losses (but your investments should at least keep up with inflation so you can maintain your standard of living).
In all cases, it's important to choose investments that match your investor profile. Are you uncomfortable when the value of your investments swings up and down? Like a roller-coaster, it's not for everyone! You can also choose safer investments. We each have our own level of risk tolerance, and that's ok.
Now, how should you go about investing for your retirement?
Like Brenda (who we talked about earlier), you're finding ways to save part of each paycheque to realize your retirement objectives. To make it easier, you've even drawn up a budget (another great idea). Once you've built up an emergency fund to prepare for the unexpected, you should start saving for retirement.
Turnkey retirement savings solutions
You don't need to be an expert to invest your savings for retirement and earn a decent return. Turnkey solutions are available, such as investment portfolios tailored to your risk tolerance and objectives.
Are you interested in socially responsible investment? All sorts of funds are available on the market for people who want to support green businesses, clean energy and other priorities. To find out which strategy is best for you, talk to a specialist.
Use systematic savings to simplify your life
Is it hard for you to put money aside? With a systematic savings plan, ou can choose an amount to be invested for you at the frequency you want (every pay period, monthly. etc.). You'll save without even having to think about it!
Managing your own retirement investments
Want to manage your own investments? Numerous solutions are available for self-directed investors, such as online brokerage solutions. These solutions let you invest your money the way you choose. Make sure you research fully before you get started: your hard-earned money will be on the line!
Pro tip: Be sure to keep a cool head when you invest. Remember, stock markets are cyclical, with highs and lows. How comfortable would you be taking losses if markets are down for a while? That's a question you'll need to ask yourself.
Should you use an RRSP or a TFSA for your retirement savings?
In an ideal world, you should take advantage of both
When planning your retirement, you should consider the main registered accounts and plans. The two most important solutions are the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). What are they? These accounts are a great way to power up your investments.
Basically, an RRSP allows you to defer your income taxes and pay less income tax overall. It does this in part by reducing your taxable income. And when your taxable income is lower, you can maximize the government benefits you receive.
What's the TFSA's super-power? Unlike with non-registered investments, you won't pay any income taxes on the income earned by investments in this account.
Consider your income and family situation
You should prioritize RRSPs if the deductions when you contribute are likely to outweigh the taxes you'll pay at withdrawal.
If you can save $500 in taxes by contributing $3,000 and when you withdraw you pay only $300 in taxes, it's worth it. In the end, you'll have saved $200! Conversely, if you're likely to pay over $500 in taxes when you withdraw the money, you're better off investing in a TFSA.
Pro tip: As we've seen, there are benefits that go beyond reducing your income taxes. Contributing to an RRSP reduces your taxable income.
Each situation is unique. To help you choose the solution that's best for you, talk to a specialist.
What about RESPs?
Do you have children? Consider investing in a Registered Education Savings Plan (RESP). This tax-sheltered savings solution lets you receive government grants, subject to certain conditions.
This tool will help you build your savings and investment strategy. Lower-income families can also qualify for grants without having to invest a dime. Pro tip: There are several different kinds of RESP, and numerous service providers offer this solution. Talk to your advisor to find the one that's right for you.
What should you do first: Pay off your debt or save for retirement?
To figure it out, you need to know how much your debt is costing you and the projected return on your investments. If the interest rate on your debt is higher than what you're likely to earn on your investments, you should probably pay off your debt. But if you're likely to earn more on your investments that you're paying in interest, you should prioritize saving (while covering the minimum payments on your debts).
Pro tip: To avoid losing control of your finances in the event of a major expense, we recommend building an emergency fund.
Even if you haven't yet figured out your retirement goals, you should start setting things up so you can achieve them when the time comes. Although your plans and personal situation may change, putting money aside is always essential. If you want to find out how to save, invest, make the most of your RRSP, TFSA or RESP, or manage your debts, talk to one of our experts. We’re here to answer your questions.