7 Tips to Maximize Your Money and Prepare for Retirement

Why Start Early?

When it comes to retirement, the earlier you plan and save, the better. With the power of compound interest and tax deferrals, starting early can make a significant difference. Let’s look at Susan’s journey, highlighting practical steps you can take to ensure a comfortable and secure retirement.

Questioning

Step 1: Visualize Your Retirement Lifestyle

Think about the kind of retirement you want. Will you want to live differently when you retire? Start visualizing the type of lifestyle you want to live when you retire so you can tailor your savings goals to that lifestyle!

Questions to Consider:

  • How old do you want to be when you retire?
  • Susan at age 30, decided she wanted to retire at 65, giving her 35 years to save.

  • Will you still work part-time?
  • Susan plans to take on part-time work to stay active and engaged. She is not counting on this income to finance her retirement, but as a source of funding for unplanned extras. You may need to include this income in your retirement plans.

  • Where will you live?
  • Susan dreams of a cozy cottage in the countryside, possibly abroad.

  • Will you rent or own your home?
  • Susan aims to own her home to avoid rental expenses, realizing of course that homeownership does come with expenses of its own.

  • What will your monthly costs be?
  • Susan calculated her monthly expenses, including healthcare, utilities, real estate taxes, insurance, groceries, and leisure activities. She plans on keeping up her current emergency fund in retirment.

    Step 2: Start Saving Today

    savingMost (if not all) articles you read about retirement will encourage you to start saving today. The reason being is over time you can earn money from your savings via compound interest.

    Understanding Compound Interest:

    • Compound interest
    • is the interest you earn on interest. It comes from reinvesting the interest you earn. It works in your favour.

    • Hypothetical examples
    • suggest that even a 25-year-old who invests $75 per month would accumulate more assets by 65-years-old compared to a 35-year-old who invests $100 per month.

    • Put as much
    • as you can away now so that you can reap the rewards later.

    • Some financial experts
    • recommend saving 15% of your pre-tax income towards tax-advantage accounts.

    Susan started saving $75 per month at age 25 and increased it each year by the cost of living. By the time she reached 65, her savings had grown significantly thanks to compound interest. The key takeaway? Start as early as possible!

    Step 3: Set a Goal

    Set GoalsTake time to carefully consider retirement expenses while factoring in inflation. Will you have other expenses that you might not have right now (such as children’s expenses)?

    Goal Setting:

    • How much do you want to have when you retire?
    • Susan aims to have $1 million saved by the time she retires. If she follows the 4% plan, she will have 40,000 per year, in addition to her CPP and OAS.

    • Will you be travelling when you retire?
    • Susan plans to travel for at least a month, twice a year, requiring additional funds.

    By setting clear goals, Susan was able to create a roadmap for her savings journey.

    Step 4: Automate Your Savings

    Take advantage of tax deferrals to a retirement account. Set up automatic payments to your Registered Retirement Savings Plan (RRSP) or Tax Free Savings Plan (TFSA). This way, the money gets deposited into your retirement savings plan before you have to think about it.

    Benefits of Automation:

    • RRSPs
    • have a high contribution limit (18% of last years income to a maximum of $31,560 in 2024), and sometimes employers are willing to match your contributions. Check with your employer to see if they match what you put in as it’s like free money.

    • TFSAs
    • If you are 18 or over, you can contribute up to $7,000 (2024) to an TFSA. At this time (2024) there is no limit on the number of years that you can contribute to your TFSA.

    • Tax Benefits:
    • Money contributed to a TFSA is not deductible on your taxes that year. When you withdraw money from that account in retirement, you do not pay any taxes on the withdrawal.

      Money contributed to a RRSP is deductible on your taxes that year. You can contribute to your RRSP until you reach the age of 70. At 71, you will be required to convert your RRSP to a Registered Retirement Income Fund (RIF or RRIF). You will be required to make specified minimum withdrawals from your RIF each once you reach 71.

      Susan set up automatic payments to her RRSP and TFSA, ensuring her savings grew consistently.

    Step 5: Diversify Your Savings

    Don’t put all your eggs in one basket! Your RRSP is just one piece of the puzzle. Consider investing in other assets, such as property, mutual funds, or bonds.

    Diversification Strategies:

    Susan invested in a mix of stocks, bonds, and real estate.

    She consulted with a financial advisor to create a diversified portfolio that matched her risk tolerance.

    Read “Expert Advisors vs. DIY: ETFs for Long-Term Success” to see why David does not use a financial advisor.

    By diversifying her investments, Susan protected herself against market fluctuations.

    Step 6: Take Advantage of Employer Matching

    If your employer matches your RRSP investments, take advantage of that! Deposit at least the maximum amount that your employer matches.

    Employer Matching:

    Susan’s employer matched her contributions up to 5% of her salary to her RRSP. She made sure to contribute enough to get the full match.

    Employer matching is essentially free money, so make sure you take full advantage of it.

    Step 7: Continually Reduce Your Debt

    Pay off your credit cards every month or pay as much as possible towards your credit card debt. When possible, accelerate your mortgage payments. As a rule of thumb, reduce your existing debt and avoid accumulating new debt.

    Debt Reduction Tips:

    Susan focused on paying off her high-interest credit card debt first.

    She made extra payments on her mortgage whenever possible.

    By reducing her debt, Susan freed up more money to save for retirement.

    Saving for Your Ideal Lifestyle: A Marathon, Not a Sprint

    Saving for your ideal lifestyle when you retire is a marathon, not a sprint. When you build your wealth over time, you don’t have to worry about tackling everything all at once.

    Key Takeaways:

    • Start Early:
    • The earlier you start saving, the more you benefit from compound interest.

    • Set Clear Goals:
    • Know how much you need and create a plan to reach that goal.

    • Automate Your Savings:

    • Make saving automatic to ensure consistency.

    • Diversify:

    • Spread your investments across different asset classes to reduce risk.

    • Take Advantage of Employer Matching:

    • Don’t miss out on free money from your employer.

    • Reduce Debt:

    • Keep your debt low to free up more money for saving.

    Building Your Future

    Remember that over time, your retirement account will build! Try to save at least 10-15% of your pretax income to start. You’re already ahead of the game by thinking about this now! Following Susan’s journey, you too can achieve financial freedom and enjoy the retirement lifestyle you’ve always dreamed of. Start today, stay consistent, and watch your savings grow.

    As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.

    Please share your thoughts in the comment section below.

    Leave a comment