While there is no advisable or definitive time to start saving for retirement, evidence suggests that starting early may get you the best results. Planning for retirement is an important part of any financial plan. However, it’s often easier said than done. There are lots of things to think about when it comes to planning for the future. Not only do you need to think about things like how you’ll stay active, but you also need to think about your social life too.
Another extremely important thing you need to consider before retirement is your financial situation. You want to ensure that the money you have saved will allow you to enjoy the lifestyle you want. But how do we know how much money we’ll need to live comfortably when we retire? According to a 2018 survey, most Canadians believe they need roughly $750,000 in savings to retire. But surveys aside, it’s advisable to plan for retirement by working out how much money you need to live comfortably. If you want to know how much money you should be saving for retirement, then keep reading below:
When Should You Start Planning for Your Retirement?
When it comes to planning for your retirement in Canada, starting early is key. In fact, many financial advisors suggest you start making plans for your retirement in your 20s or 30s. Although people in this age group often have other priorities, such as getting married, buying a home, or starting a family, it’s important to start saving money for the future as early as possible.
Investing early allows you to be more aggressive in your portfolio (holding more stocks than cash or bonds) which can help you to increase your savings more rapidly. Since stocks are subject to greater market volatility, having a longer length of time to invest before your retirement means you’ll have enough time to wait out any downfall in the market.
Many financial advisors believe that one of the major mistakes people in their 20s and 30s make is not taking enough risk. They believe that it’s a good idea to invest for retirement instead of merely save for retirement.
Retirement Planning Tips to Consider
No matter whether you’re 20 or 50, saving for retirement is a wise financial strategy. After all, we’ll all face retirement at some point, either by necessity or choice. Whether you’re only just thinking about your retirement savings, or you’ve already started saving for the future, there are some essential tips you should follow to make sure you’ve got enough money in your account. Here’s a list of some of the things you need to consider when planning your retirement:
Monitor your investments in pre-retirement – the money needed in the first 5-10 years of retirement is often the most vulnerable. This means that it’s important to avoid overspending. If this money is lost, you will struggle to recover it over time. Instead, look for investments that have predictable income sources. Just remember that the more predictable the income, the lower the return will be.
Plan for inflation – unfortunately, inflation is a part of life. Rising costs of food and other essential items can eat away at your retirement funds. You will need to consider this when planning for your retirement. Simply assume that prices will increase over time.
Talk to your partner – it’s a good idea to talk to your partner about how much money you both plan on spending in retirement. This will help you to make sure that you both have the same retirement goals. Just like discussing a new house or car while you’re working, it’s always advisable to talk through financial matters as well.
Focus on your physical health – health care can be expensive. Research has shown that most people overlook the cost of health care when planning for their future. If you want to reduce the amount of money you have to spend on health care in the future, then you will need to try and keep your body fit and healthy.
Stick to a budget – one of the most important things you can do when creating a plan for the future, is to work out how much money you will have available to spend.
Reduce travel expenses in retirement – travelling the world is usually easier and cheaper when you’re younger, so take trips abroad when you’re young. If you do choose to go abroad when you retire, then be sensible about your spending. Keep the same habits you have at home while you’re away.
Pay off your mortgage – your home is more than just a place to stay warm and dry; it also makes up a huge amount of your fixed expenses. Paying off your mortgage early will allow you to reduce your monthly expenses as you will be living “rent-free”.
Work longer – although many people don’t like the idea of working once they’ve retired, it’s a great way to increase the amount of spare money you have available. Even just a couple more years of working can significantly increase your retirement funds.
Be ready for surprise expenses – no matter how much you plan for your retirement, surprise expenses are inevitable. You will need to make sure you have enough money to deal with any issues that arise e.g., a broken washing machine.
What Can Change Your Retirement Income Needs?
Calculating your income needs isn’t always straightforward. Life happens, and it may leave your retirement plans in tatters. Some possibilities include:
- Significant mortgage payments
- Financially dependent children in retirement
- Market crash or runaway inflation etc.
- Health issues that can force you to retire earlier than you’d expected, or which result in higher-than-expected medical bills in retirement
5 Ways to Save for Retirement
If you’re years away from retirement, you may not think it’s important to start saving yet as your money can be better spent on other things. However, saving early is important. Not only do you need about 70% of the money you earn at the peak of your employment to maintain a good standard of living, but you also need to plan for major life events – expected or unexpected – which may include long-term care, medical needs and varying family dynamics. When you include inflation, these numbers can quickly start increasing. This means that saving early is more important than ever.
Thankfully, there are several options available to people in Canada who want to start saving for their retirement. From the traditional RRSP (Registered Retirement Savings Plan) to the less well-known TFSA here are some options available to you:
RRSP – An RRSP is a savings account designed to help Canadians save for retirement. You do not have to pay income tax on any contributions you make to your RRSP. Any funds earned from these investments are also protected from tax if they remain invested. RRSPs are a brilliant option for people who want to be able to retire comfortably in the future. The RRSP from Wealthsimple is a great option. It offers optimized returns at a fraction of the cost of what big banks charge. Not only that, but it’s simple and easy to set up too.
RIFs – A Retirement Income Fund (RIF) is a tax-deferred retirement plan. This type of plan can only be opened by people who are over 55 years of age.
Canadian Pension Plan – Canadians pay into this plan their entire working life. Once a person has retired, they will start to receive monthly payments from the Canada Pension Plan Investment Board. The amount of money you receive will depend on how much money you have contributed and how long you’ve been contributing to it.
Old Age Security Pension – most people are unaware of the OAS. However, everyone in Canada qualifies for this pension once they reach 65 years of age. No matter whether you’ve been employed in the past or not, you will receive this benefit.
Guaranteed Income Supplement – this pension is specifically for people who are on a lower income. It is a supplement to the OAS pension mentioned above. Your income tax declarations will determine whether you receive this payment.
There are also several other ways you can save for retirement, including pension plans, real estate, and TFSAs.
How Much Money Do You Need to Retire?
So, how much money will you need for retirement? The amount of money you need to save will depend on the type of lifestyle you want to have when you retire. The typical rule of thumb is that you need to have between 70-100% of the income you were getting before you retired if you want to live comfortably. However, if you’re still paying off your mortgage when you retire, you will need as much of your annual income as possible to stay afloat.
Unfortunately, when it comes to the amount of money you need to save for your retirement, there is no magic number. However, saving early is key if you want to live comfortably in your golden years. If you think about it, it’s like asking, how much money do you need to buy a house? Well, the amount you need will depend on the style of house you choose and how large it is. It will also depend on things like the location and what the interest rates were at the time.
The same is true for retirement. Before you start planning for your retirement, you first need to decide how you want to live during your golden years and estimate the amount of return you expect to see on your investments. You can then make a plan for the future.