For someone who is just a few years into their working life, looking forward to growing and shaping a career over the decades to come, retirement is hard to fathom. Who wants to think about staying home and gardening when you’ve got a corporate ladder to climb?
The irony is the best time to start planning your retirement years is when you’re nowhere near ready to retire. You don’t have to buy a leisure suit. Just take some time to set up a plan, create some good saving habits and, with time on your side, watch your retirement fund grow.
How much is enough?
There’s no magic number that’s the right amount to save for retirement. It’s different for everyone, and lots of factors help determine how much money each individual should aim to save.
However, a financial planner or an online calculator like BMO’s Retirement Savings Calculator www.bmo.com/financial-calculators/retirement-savings can help hone in on the number that’s right for you.
According to Marlena Pospiech, Senior Manager, Wealth Planning Strategy at BMO, someone who is 30 today might need around $1.2 million to retire at age 60 and live until age 90 with annual retirement income of $40,000.
“That figure might shoot up to about $2 million if you factor in a longer life expectancy or higher living expenses,” Pospiech says.
Getting there from here
Saving $1.2 million over 30 years is a lot easier than saving the same amount over 10 or 20 years, Pospiech points out. Starting from zero savings and relying on government pensions (such as Old Age Security and the Canada Pension Plan), with the help of a six per cent rate of return and tax-deferred compound growth, you would need to save about $28 per day, or about $853 per month, to reach the goal of $1.2 million in 30 years.
“So you should take a look at your current expenses to see if there’s anything that you could possibly cut back on to equate to that $28 per day,” Pospiech says. “It might be little things like brown bagging your lunch and snacks or making your coffee at work instead of buying your coffee. Or it could be bigger things, like forgoing a winter vacation down south or living with a roommate to cut costs.”
And remember, at age 30, you’re probably nowhere near your peak earning years.
“As your income level increases and your financial situation improves, then you could start to increase your savings rate accordingly,” Pospiech says. “That way you’ll increase your Registered Retirement Savings Plan (RRSP) savings and reach your retirement goal sooner than planned.”
Make it automatic
The easiest way to contribute to your retirement savings fund regularly and reliably is to automate the process by setting-up a pre-authorized payment plan. You arrange for your financial institution to withdraw a set amount from your chequing account every week or every month and deposit it into your RRRSP or Tax Free Savings Account (TFSA). That way, you don’t have to remember to transfer the funds, and you won’t be able to contemplate spending that money on new shoes or a concert ticket. Better yet, ask if your employer can have your paycheque divided and directly deposited into two different accounts – one for daily expenses and one for your retirement.
Again, don’t forget about salary increases. When you get a raise, boost your pre-authorized payment amount.
“The more you make, the more you tend to spend,” Pospiech says. “So try to sock some of it away instead of spending it.”
How to invest your savings
The two most common places to invest retirement savings are in an RRSP and a TFSA. You can contribute up to $22,970 in your RRSP for the 2012 tax year, plus unused contribution room from previous years. And you don’t have to pay tax on the investment returns on any money you contribute to your plan as long as it stays in the RRSP. However, you do have to pay tax on your investment returns when you withdraw them, hopefully when you’re retired and are in a low tax bracket.
With a TFSA, you can invest up to $5,500 in 2013, plus unused contribution room from previous years. You’ll be investing money that has already been taxed, but you won’t have to pay tax when you withdraw your funds.
According to Pospiech, ideally, it’s great to take advantage of both of these savings vehicles, which can be used to boost your savings by investing in a tax-efficient manner in a wide range of investments, such as mutual funds, stocks, bonds, Guaranteed Investment Certificates (GICs) and Exchange Traded Funds (ETFs). While both plans are effective and should be viewed as complementary, an RRSP is generally more advantageous to someone in a higher tax bracket – especially someone in his or her peak earning years expecting to be in a lower tax bracket at retirement. A TFSA may make more sense for someone in a lower tax bracket, who is in the early stage of his or her career and can only contribute to one plan.
But what matters most is to stop delaying and start saving, because a comfortable retirement is definitely achievable.
“I encourage everyone to get a personalized financial plan and run the calculations based on their own personal situation,” Pospiech says. “By looking at scenarios that show how much they’ll need to contribute if they start saving now versus starting in 10 years or more, they’ll see that time makes a huge difference.”