Retirement is inevitable and will come sooner than you think! This is why planning is key and in this blog post, I’ll be sharing 5 simple steps to plan for your retirement. Not just any retirement, a comfortable one, using vehicles that will help you save and strategies to utilize that will supplement your retirement income! You don’t want to be planning for your fire escape route when the fire is outside of your door and likewise for retirement, you don’t want to wait to plan until you reach your retirement age either. 

Like planning for anything, you want to know what’s the end goal you are trying to achieve. When do you want to retire? At 60? 65? Or like many millennials’ dreams, 40? By asking this first question, it would allow you to have an idea of the amount of time you have for saving. Once you find out how much time you have on hand for savings, then you can start working on it such as the amount you need to save per month, and how aggressively you should try to save. 

Another important question you need to ask yourself is, what is your definition of retirement? To one person, retirement means working reduced hours, whereas to another person it means stop working entirely. This is important because if retirement means to completely stop working for you, then you better make sure you are on track to saving up enough for you to do that. As I always say, a goal without a plan is just a wish. Keep in mind though, having an answer to these questions doesn’t mean they are set in stone, they can certainly change if your situation changes as you approach your retirement. 

So what do you want to do in your retirement? Comment below!

Now you might be wondering, exactly how much do you need to save to reach that retirement goal?  Well, there’s no easy answer for this question. There are lots of formulas and online calculators that will help you work out a figure. And they do provide helpful guidelines, but ultimately the person would have to calculate the amount necessary for their retirement, because only they would know how much is enough for them. The key here is that this amount should be calculated taking inflation and the future value of money into account. Once you can figure out the amount required for your retirement, you can see clearly the monthly savings target you would need to reach your retirement goal. 

For instance, Sam, aged 25, wants to retire at 65 which is 40 years from now. He currently makes $2000 per month. With inflation of 2.5% per year, he needs to make $5400 in 2060 in order to keep the same buying power as today. In other words, Sam needs to make sure he has $5400 of income per month from somewhere by the time he retires. If he wants to solely depend on his saving, then he needs to save around $1.2 million for his retirement. With a 5% return per year, the $1.2 million will give Sam $60,000 a year and that is $5000 per month.

Be careful here though, there’s a lot of uncertainties here, because you need to factor in the extra medical costs you might need, longer life expectancy, or fluctuating inflation rate and cost of living, etc. This is why it’s advisable to always save more than what you think you’ll need to take into account the unforeseeable. Another thing that matters is the amount of expenses. Some people live frugally, while others might live lavishly; people might be a homeowner, or they have been renting all along; some might have a car that they need to pay for, whereas some only take public transit. As a result, everyone’s lifestyle and expenses can be very different. Unless you expect to change your lifestyle 100% at your retirement, chances are your expenses would be more or less the same as your current lifestyle.

As you might have figured out by now, it’s never too late to start saving for your retirement. In fact, we should save for retirement the moment we start working. 

By starting earlier, not only we are able to save up less each month to reach our retirement goal, we can also take full advantage of compounding returns. Let’s look at an example here. Mary starts saving for her retirement at 25. She saves $3000 per year, around $250 a month. If she invests this amount with a 7% annual return since 25, she would have over $600,000 by the time she retires at age 65. Now Gary didn’t start doing the same until he’s 35. He invests the same amount each month as Mary, and by the time he retires at age 65. But with the same 7% annual return, he would have just over $300,000 by the time he retires. The end result here is that Mary contributed only $30,000 more than Gary, but she has double the amount that Gary has at age 65. 

This is the power of the compounding effect.

How to save for your retirement in Canada

Now that you understand how to kick-start your retirement planning and the importance of saving early, the next ingredient to the recipe of retirement planning is what saving vehicles that you’ll be using? In Canada, there are two main vehicles that Canadians can use for saving up their retirement funds: 

  1. Registered Retirement Savings Plan (RRSP)
  2. Tax Free Saving Account (TFSA)

In a nutshell, not only contributing to RRSP can lower your taxable income for that year, if done properly it would allow your retirement savings to grow to a substantial amount tax-sheltered. But be careful, RRSP is like a double edge sword, it might hurt you if you blindly follow what other people do. For more information, you can learn how RRSP can help or break your retirement here. 

The other account that you can take advantage of is the Tax Free Savings Account (TFSA). Canadians can open up this account as soon as they turn 18. Unlike the RRSP, the contribution limit is not determined by income but by age, so this account is a perfect place to keep your money to avoid retirement benefit claw backs. The take home message though, whether you decide to use either the RRSP or the TFSA, or both, don’t treat them like a savings account and forget about it. At the minimum, you need to be investing in something that would give you interest, so that your money’s future value can beat the inflation. 

Aside from these two main famous investment accounts, you can get creative with other ways to build up your retirement portfolio. If your company offers you a pension plan, then great, make sure you start contributing as soon as possible; it could really pay off at the time of your retirement. But if you are like me, a self-employed and a business owner, it’s not the end of the world, there are various ways that can help you save as well. 

Real estate and retirement planning 

Most of you may already know, real estate is a huge vehicle that Canadians like to use to accumulate wealth. In a survey done back in 2018, it is estimated that 77% of baby boomers across Canada are homeowners, and the average net worth of homeowners was $824,000, 7 times more than that of renters in 2012. But as attractive as it seems, you may be tempted to put everything in real estate, that’s probably not the best idea. 

The saying “never put all your eggs in one basket” is always true. 

When working on a good retirement plan, it’s always a good idea to stay flexible and be creative. For instance, you might want to work past the age of 65 with part time hours. You might be surprised by how much difference a few years’ worth of contributions make to your retirement fund. Also, a lot of people tend to focus on making more income, but it’s just as important to cut down your expenses too. When you have extra money sitting around, is it smarter to pay down the debts first or to contribute into your retirement savings? The interest you save by paying down your debt could mean a lot for your retirement. As you age and get closer to your retirement though, you might want to revisit your investment portfolio and rebalance it according to your risk appetite. The risk tolerance for a 25-year-old versus a 50-year-old person can be drastically different.

For homeowners out there, you have one extra option beside renters, and that is to do a reverse mortgage. A reverse mortgage is a loan that allows you to get money from your home equity without the need to sell your home, and you can borrow up to 55% of your home’s current value. In most of cases, the bank allows you not to make any payments until you sell your house or you pass away.

Now that we have powered through the essence of retirement planning, do you feel more confident about your retirement? I understand that for most people, managing money is a stressful thing to do, but just think about it, if you can put up with this little bit of stress right now, you could very well live a stressful free retirement life! Seems worth it doesn’t it? No matter how small your progress is, believe me, any contribution is better than doing nothing. So, start today, come up with a plan, get help from a professional and stick to your plan.