Financial strategies change as you advance through life.
With only a minority of Canadians in the workforce covered by an employer pension plan (about 40 per cent, according to Statistics Canada), many of us will have to look after ourselves in our retirement years.
The Registered Retirement Savings Plan (RRSP) and its close cousin, the Tax-Free Savings Account (TFSA), will likely be the most important tools available to support our financial needs in retirement. Here are some key strategies to keep in mind at various stages in your life:
Your 20s and 30s – If you walk away with just one pearl of wisdom at this early stage in your life and career, it is this — absolutely do not waste your single biggest asset: time.
While spare cash at this age may seem modest and there will be plenty of competing interests for your money, you have time on your side to allow even the smallest savings to become significant 30 or 40 years down the road. As those who wait until later years to save will tell you, delays in saving have a dramatic effect on your final balance going into retirement.
This is where an RRSP becomes a young person’s best friend. Unlike a traditional bank savings account, an RRSP allows you to make tax-deductible contributions for retirement to grow quietly at a steady pace. Since the money is only taxed if withdrawn before retirement, there is less temptation to spend your savings.
Consider the following options:
Divert a manageable amount of money from your paycheque to your RRSP and/or TFSA monthly (even a minor amount is better than nothing).
Take full advantage of any matching employer contributions to your RRSP.
Try hard to develop good savings habits and don’t just save for retirement. You may need other savings for an emergency, or as a down payment on a home.
Your 40s – By now, there will be many different interests competing for your money. From children to home ownership to vacations and hobbies, money will likely appear to be going out as soon as it is coming in. It’s also at this stage when most people who haven’t begun saving will realize the error of their ways. Don’t worry, it’s not too late.
To get on track and begin surging forward, this is a critical time to identify your current expenses and income available for a flexible savings plan. You should begin thinking of longer-term goals and objectives, such as envisioning your retirement objectives and choosing a path to get there.
If you already have savings in place, this is the time to determine whether your money is working hard enough for you.
Your 50s – For many, these are the years when income potential is peaking and that means having a very clear picture of what you are spending year-to-year, and whether you are on a path to live the lifestyle you desire in retirement. You will need to determine whether you are contributing enough to your RRSP and TFSA to meet future goals. Again, you may also want to re-examine and lower your exposure to market risk in your investment portfolio, including your retirement savings plans.
Your 60s – Whether you are ready to retire or just considering another chapter in your life, this is when you will begin taking a hard look at your income needs year-to-year and your outside sources of funds, such as government retirement benefits, rental properties and savings. It is also an important time for both you and your spouse or partner to talk about how you want to spend future years. Some couples are surprised to learn of each other’s different expectations for living standards in retirement.
From a financial perspective, you need to know how much you have to rely on savings and investments, and whether you are on track. The reality is that your portfolio must not only provide for your current income needs, but also must be able to sustain your needs throughout your retired years, which can be 25 years from now.
Bruce Shepherd is a financial advisor with Edward Jones. This article is provided for information purposes only. Please consult with a professional advisor before implementing a strategy.