As an adult, you're so busy that retirement planning can seem far away. It's even easier to push your retirement planning to the backburner as there are pressing financial priorities coming up today, like the rent, mortgage, or kids.
But the scary truth is that if you want to retire comfortably, your best bet is to start saving as early as possible. This way, you'll be able to enjoy the retirement that you've been envisioning instead of worrying about how you'll make ends meet.
Here's why early retirement planning is so important and how to do it successfully.
Why is Early Retirement Planning Important?
Planning early for retirement pays off - and not just when you finally stop working. Here's why you need to start your retirement planning now.
Additional Income from Government Programs Aren't Enough
Most Canadians are eligible for income from two government programs when they retire.
The first of these is the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP). You'll be eligible for CPP or QPP payments when you retire if you've ever earned income in Canada and contributed to the CPP or QPP. The amount you get will depend on how much you contributed during your working years and how long you contributed for.
The second major government program is the Old Age Security (OAS) pension. This is a benefit that everyone in Canada qualifies for once they hit 65. It doesn't matter if you've never earned a dime in your life.
Although CPP/QPP and OAS payments can give you a financial boost in retirement, they're meant to offset only about 25% of your retirement income. For this reason, you'll need to come up with at least 75% of your retirement income from other sources.
Retirement is Expensive
Day to day life is expensive already. Now imagine that once you retire, meaning there's no new paychecks every two weeks.
As it's outlined above, government programs will go only so far in funding your retirement. This means that you'll need to save a good chunk of change on your own.
After all, the last thing you want is to be forced to sell your home or miss out on a vacation because you can't afford to spend much in retirement. And you'll probably want to be able to enjoy the years that you don't have to work with your family, not worrying about each bill.
Older Investments Have More Time to Grow
If investments are the way you plan to earn some of your retirement funds, you'll want to get started on this ASAP. Naturally, the earlier you put money in, the more time it has to grow. This lets you maximize the amount of money that you'll end up with in the future.
Investing money early also protects you against short-term dips in the stock market. If the stock market takes a dive when you're still far away from retirement, you'll have time to recover financially. But if you're scrambling to save for retirement in your 50s or 60s, you won't have as much time to recover from unexpected losses.
Saving for Retirement Can Lower Your Income Tax
Think that saving for retirement won't pay off until the day you actually retire? Think again. Because if you use a registered retirement savings plan (RRSP) to save for retirement, you'll start benefiting right away.
When you put money into an RRSP, you get to deduct this amount from your annual income. This can reduce the amount you have to pay in income tax for the year.
7 Tips for Successful Retirement Planning
Now that you know why it's so important to start planning for retirement early, let's talk about how to actually do it.
To set yourself up for a comfortable retirement, follow these 7 tips for successful retirement planning.
1. Identify Your Retirement Goals
Before you start saving for retirement, it's important to know what you're actually saving for. In other words, what do you want your retirement to look like? Do you want to spend most of your time travelling? Are you thinking of relocating and buying a home in a different part of the country? Would you like to pay for your grandchildren's postsecondary education?
When you have at least a rough sense of your big retirement goals, it'll be easier to determine how much money you'll need to have saved up to enjoy financial security when you retire.
2. Make a Retirement Budget
Once you've identified your retirement goals, make a monthly retirement budget to find out how much money you'd need to make them happen.
For example, let's say that you want to split your time during retirement between your current home and a vacation home down south. Be sure to factor all of the costs of leading a snowbird lifestyle into your budget. This will include the costs of owning and maintaining two homes, travelling back and forth between them, and securing health insurance in multiple jurisdictions.
Of course, you'll also need to include other daily expenses, such as groceries, personal care, and entertainment, in your budget. And you'll want to factor in a vacation fund, rainy day fund for emergencies, and any other major expenses.
3. Determine How Much You Need to Save
Retirement planning is easier when you know how much money you need to save. How can you estimate this amount?
Identify all of the money you've already saved up (including any gains you expect to make from it over the years). Then factor in the amount you expect to get from government programs, such as CPP and OAS. Use these amounts to estimate your monthly retirement income.
Once you've estimated your monthly retirement income, compare it to your monthly retirement budget. The difference between the two represents how much more money you'll need each month to support your retirement lifestyle. Multiply this amount by the number of months you expect to be retired for. This will give you an estimate of the total amount you'll need to save.
4. Create a Savings Plan
It's one thing to decide that you're going to start saving money for retirement. But especially when you have competing financial priorities, it's another thing to actually tuck that money away on a regular basis. That's why it's helpful to create a savings plan.
A savings plan helps you identify the best way to save money based on your savings goals. And it helps you put measures in place to ensure that you make steady progress toward these goals. For example, a savings plan can help you figure out how much you should automatically transfer into a savings account every time you get paid.
5. Set up Accounts Specific to Retirement Savings
If you're starting to take your retirement planning seriously, you'll want an account where you keep money just for that to avoid spending it. There are two types of savings accounts that Canadians typically use to save for retirement: RRSPs and TFSAs (tax-free savings accounts).
With an RRSP, you contribute a portion of your income before taxes. The amount you can contribute depends on annual limits, your income, and your previous contributions. You don't get taxed on the money you make while it remains in your account. But you will get taxed on your withdrawals because they'll count as income.
A TFSA is an account that you deposit money into after income tax. Unlike with an RRSP, however, you'll never get taxed on the capital gains, interest, and dividends that your TFSA investments earn—even when you make withdrawals. The amount you can contribute to your TFSA each year depends on annual limits and your previous contributions.
If your employer offers one, you can also use a workplace pension plan to save for retirement. Pension plans can be convenient ways to save because your employer will automatically allocate a portion of your paychecks to pension contributions. Plus, if your employer matches employee contributions, you'll end up saving even more than what you individually contribute.
6. Pay Off Debt
When you're saving up for anything, it's important to pay off any debt you have too. After all, the more debt you still have when you retire, the more it'll eat into your retirement fund. So as part of your savings plan, be sure that you have a strategy for paying off debt. This might include credit card debt, a mortgage, or a car loan.
Remember, you don't need to wait until you're on the verge of retiring to pay off your debt. The sooner you can get it off your financial plate, the less money you'll end up paying in interest over the years. This will leave more money in your pocket for your retirement fund.
7. Save On an Ongoing Basis
Besides starting your savings early, the next best thing you can do is put money aside regularly. After all, if you "start" early by putting aside money once in your twenties and never looking back, you won't save a ton despite starting early. In other words, don't save just when your CPP or workplace pension contributions force you to. Build on your RRSP and TFSA funds each year, and tuck away a percentage of every paycheck you get. Set it up as an automatic deposit so you won't be tempted to spend the money in your account - you can't spend what you don't see!
Final Notes on Retirement Planning
Saving for retirement is easier when you give yourself decades to do it gradually. When you're planning for retirement, get started as early as you can.
Even if you can set aside only small chunks of change on a regular basis, you'll do yourself a huge favour. You'll be much more likely to enjoy financial freedom when you finally retire.
Why spend your golden days stressing when you can do things that you've always enjoyed? Retirement planning lets you do just that.