Many factors play a part in the outcome of retirement planning, like lifestyle, future projects, and investments. The secret to a happy retirement is preparation: here are some guiding principles on how you can best prepare for the big event.
In order to know how much to save for retirement, two rules of thumb are often used. The first recommends saving 10% of a gross salary every year. The second suggests that enough is saved upon retirement to receive 70% of your income annually. The latter is based on amounts offered by defined benefit pension plans and assumes that people have fewer needs during retirement, although this is not always the case.
These rules can help define goals, especially if you’re still young and your retirement plans are not yet clear.
Determining needs takes a little bit of work. Create a budget by taking note of all fixed expenses (mortgage, property taxes, internet, television, phone) and variable expenses (groceries, clothing, gas, recreation). Also think about the desired lifestyle in retirement and be as precise as possible.
Have you not yet begun saving for retirement? That doesn’t necessarily mean that you have nothing. Do you own a house or investment property, a cottage or a business? They could eventually be sold at retirement or kept to generate ongoing income.
Consider government programs and verify the amounts you could receive from the following:
This federal government program gives retirement benefits to Canadians, whether they have worked or not. The amount received is not based on income. It is established based on the number of years the person has lived in Canada after the age of 18.
If income is low at retirement, people can also receive this supplement from the federal government for those receiving Old Age Security.
If you have a pension fund at work, you should also verify the benefits you could receive. If you have a group Registered Retirement Savings Plan (RRSP) or a Voluntary Retirement Savings Plan (VRSP), consider doing this as well.
Other factors to consider when planning for retirement are inflation and investment returns. A financial advisor can also provide even more precise projections depending on your situation.
Are you not currently saving enough? Go back to your budget. You can either revise your goals or increase your savings—or do a bit of both. The more years you have ahead of you, the easier making corrections will be. Put the odds in your favour and opt for systematic savings. It’s the best way to discipline yourself.
In the long term, choosing the right investment tools can make a big difference in your retirement savings. The most common tools include:
Funds deposited are tax deductible. You can reinvest your tax refunds and grow your savings faster. At retirement, withdrawals are taxable.
Funds grow tax-free. This means that returns are tax exempt. Contributions are not deductible, but withdrawals are not taxable either.
These tools can include different types of investments: mutual funds, exchange-traded funds, guaranteed investment certificates, stocks, bonds, etc. Portfolios should be well-diversified and correspond to your investor profile.
Review these calculations and strategy at every important stage in life. The purchase of a home, birth of a child or receiving a promotion at work are great examples of times to do so.
A budget, a retirement plan and a saving strategy are essential to determine how much you should save for retirement. They’re also the best way to achieve your goals. The sooner you start, the easier you’ll get there.
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