What is the Golden Rule of Retirement Planning?

It Doesn’t Have to Be Complicated

Retirement planning can feel like a daunting task, but it doesn’t have to be complicated. With the right approach and a commitment to taking small but consistent steps, you can set yourself up for a comfortable and secure retirement.

rules of money managementThe golden rule of retirement planning is simple: Commit to saving at least ten percent of your gross income. Let’s break down how this golden rule, along with a few other key principles, can guide you toward a financially secure future.

Step One: Commit to Saving for the Future

The first and most crucial step in retirement planning is committing to save for your future. This isn’t just a suggestion—it’s a necessity. If you don’t save money today, you won’t have security for the future. You need to strive to save ten percent of your gross income each year.

This might sound like a lot, but it’s straightforward. Take your yearly gross income (that’s before any deductions) and move the decimal point one position to the left. For example, if you make $50,000 a year, your goal should be to save $5,000 each year. If saving that much seems impossible, it’s time to take a hard look at your spending. You may need to cut back on wants and focus on needs.

Having trouble distinguishing needs from wants? Read out excellent article “The Basic Rule of Personal Finance: Needs vs. Wants”.

This step is non-negotiable. If you’re not willing to commit to saving ten percent of your income, you’re putting your future financial security at risk. It’s that simple. So, the first piece of advice is this: make the commitment to yourself and your future.

Step Two: Open an Investment Account

Once you’ve committed to saving, the next step is to put that money to work by opening an investment account. This is where your money can grow over time, thanks to the power of compounding interest and market returns.

You’ll want to open an account that allows you to buy both registered investments (like RRSPs and TFSAs) and non-registered investments. Linking this investment account to your bank account makes it easy to transfer money and keep an eye on your investments.

managerThink of yourself as your own personal portfolio manager. You’re in control of where your money goes and how it grows. The key here is to make sure that your money isn’t just sitting in a savings account, earning minimal interest. Instead, it’s being actively invested in assets that have the potential to grow over time.

Step Three: Invest Wisely

Now that you’re saving at least ten percent of your gross income and have an investment account set up, it’s time to start investing. This is where your money can really begin to grow.

The good news is that investing doesn’t have to be complicated. The internet has made it easier than ever to buy and sell investments. You can start by purchasing shares of a fund, just like you would make any other online purchase.

One of the smartest ways to invest is through exchange-traded funds (ETFs). ETFs allow you to invest in a globally diversified mix of stocks and bonds with very low management fees—usually around 0.2%. Compare that to the 2-3% fees often charged by actively managed funds, which often deliver mediocre returns, and it’s easy to see why ETFs are a better choice for many people.

For more on this, read David’s article “Investing Made as Easy As One Two Three”.

Funds, stocks, bonds, index funds and ETFs explained at “Navigating Financial Funds: A Guide for Smart Investments”.

The key is to start investing as soon as possible. The earlier you invest, the more time your money has to grow and compound. Over time, even small investments can add up to a substantial retirement nest egg.

Step Four: Use Leverage to Maximize Free Money

Finally, let’s talk about leverage—specifically, how to maximize the amount of “free money” available to you. There are two key ways to do this:

  • Invest in a Registered Retirement Savings Plan (RRSP):
  • Contributing to an RRSP reduces your taxable income, which can lead to a tax refund. The smart move here is to reinvest that tax refund into your RRSP for the next year. Repeat this process every year, and try to increase your RRSP contributions whenever you get a raise or bonus. This strategy allows your investments to grow and compound over time, leading to a larger retirement nest egg.

  • Take Advantage of Employer-Matched Pension Contributions:
  • If your employer offers a pension plan with matched contributions, make sure you’re taking full advantage of it. This is essentially free money that your employer is offering to help you save for retirement. The more you contribute, the more your employer matches, and the bigger your retirement fund grows.

Both of these strategies are about making the most of the opportunities available to you. By investing more money earlier, you give your investments more time to grow and compound, which can make a big difference in the size of your retirement savings.

The Bottom Line

Retirement planning doesn’t have to be complicated, but it does require commitment and consistency. The golden rule—saving ten percent of your gross income—is the foundation of a secure retirement. By following the additional steps outlined here—opening an investment account, investing wisely, and using leverage to maximize free money—you can build a solid financial future for yourself.

Remember, small changes today can have a big impact on your future. It’s never too late to start planning for retirement, and the sooner you begin, the better off you’ll be. So take the first step today: commit to saving for your future. Your financial security depends on it.

Water BarrelThe BalanceIn my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.

Disclaimer for ManageYourMoney.ca

The information provided on ManageYourMoney.ca is intended for educational and informational purposes only. It should not be taken as financial advice. The opinions shared are those of the authors and are meant to encourage sensible financial habits and decision-making. We recommend that you do your own research or consult a certified financial advisor before making any financial or investment decisions. All investments come with risks, and there is no guarantee of success. Past performance is not a reliable indicator of future results. Always consider your personal financial situation and risk tolerance before pursuing any investment opportunities.

As always, we are not a qualified financial advisors. We just relate financial management to our own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of ours came from expensive experiences.

Please share your thoughts in the comment section below.

1 thought on “What is the Golden Rule of Retirement Planning?”

Leave a comment

Verified by MonsterInsights