Where to Start with Retirement Planning?

The Dream of Freedom 55

In 1984, a slogan captured the imagination of Canadians: “Freedom 55.” Created by London Life Insurance Company, this phrase painted a picture of early retirement at age 55, where one could enjoy life before the physical and mental demands of old age began to take their toll.

The idea was enticing, representing freedom, leisure, and the ability to live life to the fullest. But for most Canadians, Freedom 55 remains a distant dream. With government and company pensions typically kicking in at age 65, retiring at 55 requires a substantial nest egg, one that many find difficult to achieve.

The Golden Rule: Save Ten Percent

In the world of personal finance, there’s a simple rule that can lead to a secure and possibly early retirement: save ten percent of your gross lifetime earnings. This means setting aside ten percent of your income before taxes and other deductions, consistently, throughout your entire working life. While this rule sounds straightforward, the reality is that many people struggle to meet this goal. Life’s expenses, unexpected events, and a lack of financial discipline can make saving difficult.

We are strong believers in saving as explained in our post “Understanding the 80-10-10 Rule for Personal Finance”.

So, what happens if you’re approaching retirement with little or no savings? Should you give up and just live in the moment, hoping for the best in your later years? Absolutely not. Retirement is inevitable, and it’s crucial to prepare for it, even if you’re starting late.

Step 1: Start Saving Now, No Matter Your Age

savingIf you haven’t started saving for retirement, the time to start is now. Even if you’re closer to retirement age than to your early career, saving can still make a significant difference in your future quality of life.

Begin by figuring out your annual taxable income. This is the amount reported on line 2600 of your CRA notice of assessment. Once you have that figure, simply move the decimal point one place to the left to calculate ten percent of your annual income. This is your starting point for retirement savings.

For example, if your taxable income is $50,000, ten percent would be $5,000 per year or approximately $417 per month. Setting this amount aside may seem daunting, but it’s a crucial step toward securing your financial future.

Step 2: Make Savings Automatic

automatic savingsThe easiest way to ensure you save consistently is to make it automatic. Set up a direct deposit that transfers ten percent of your monthly income into a retirement savings account. By doing this, you’ll never have to worry about forgetting to save or spending the money elsewhere. You’ll learn to live on what’s left after your savings are tucked away.

Step 3: Adjust Your Savings as Needed

Starting with ten percent is great, but if you’re beginning your retirement savings later in life, you may need to save more to catch up. Once you’ve established the habit of saving, consider increasing the amount you set aside each month. Even small increases can make a big difference over time, especially when compounded with interest and investment returns. Read about compound interest growth in David’s post “Fun In The Snow – Compound Growth Explained”.

Step 4: Invest Wisely

Saving is just the first step. The next is to ensure your money works for you. Investing in a well-diversified, low-fee portfolio can help your savings grow faster than they would in a traditional savings account. For those who are unfamiliar with investing, consider seeking advice from a financial advisor or researching safe investment options that align with your risk tolerance and retirement timeline. David has a very enlightening post at “Investing Made as Easy As One Two Three”.

Step 5: Understand Your Retirement Needs

Planning for retirement isn’t just about saving money; it’s about understanding how much you’ll need to maintain your desired lifestyle. Start by estimating your post-retirement expenses. Consider costs such as housing, healthcare, food, travel, and hobbies. Don’t forget to factor in inflation, as the cost of living is likely to increase over time.

Once you have a rough estimate of your retirement expenses, you can better assess how much you need to save. If you find that your current savings plan falls short, don’t panic. There are steps you can take to increase your savings or adjust your retirement goals to fit your financial situation.

Step 6: Consider Government Benefits

In Canada, several government programs can provide financial support in retirement. The Canada Pension Plan (CPP), Old Age Security (OAS), and the Guaranteed Income Supplement (GIS) are three key programs that most retirees will rely on. Understanding how these benefits work and when you’re eligible to receive them is crucial to your retirement planning.

The CPP provides a monthly pension based on your contributions throughout your working life. The amount you receive depends on how much and how long you contributed. OAS is a monthly payment available to most Canadians aged 65 and older, regardless of their work history. GIS is an additional benefit for low-income seniors receiving OAS.

While these programs provide a foundation, they are unlikely to cover all your retirement expenses, so personal savings and investments remain essential.

Step 7: Stay on Track with Regular Check-Ins

Retirement planning isn’t a one-time task; it’s an ongoing process. Regularly review your savings, investments, and retirement goals to ensure you’re on track. Life circumstances, financial markets, and personal goals can change, so it’s important to adjust your plan as needed.

If you experience a significant life event, such as a job change, marriage, or the birth of a child, revisit your retirement plan to ensure it still aligns with your future needs. Even if nothing major happens, a yearly check-in can help keep your retirement plan on course.

Step 8: Be Prepared for the Unexpected

Life is full of surprises, and not all of them are pleasant. Health issues, job loss, or economic downturns can all impact your retirement savings. While you can’t predict the future, you can prepare for it by building an emergency fund. (This fund is in addition to your retirement savings.) Aim to save at least three to six months’ worth of living expenses in a liquid, easily accessible account. This fund can help you weather financial storms without dipping into your retirement savings.

Additionally, consider insurance options that can protect your retirement savings. Life, disability, and critical illness insurance can provide financial support in the event of a major health issue or loss of income.

Step 9: Maximize Your Retirement Income

When you reach retirement age, it’s time to start thinking about how to maximize your income. One way to do this is by delaying your CPP and OAS benefits. For every year you delay taking CPP past age 65, your monthly benefit increases by 8.4 percent, up until age 70. Similarly, delaying OAS can result in a higher monthly payment. (Note: Neither David nor I recommend deferring you CPP or OAS beyond age 65 as the benefit does not outweigh the disadvantages.)

Another strategy is to convert your Registered Retirement Savings Plan (RRSP) to a Registered Retirement Income Fund (RRIF) when you retire. This allows you to withdraw money from your retirement savings in a tax-efficient manner while continuing to grow your investments.

Consider working part-time during retirement to supplement your income. Many retirees find that working a few days a week not only provides extra money but also keeps them active and engaged.

Step 10: Plan for Healthcare Costs

healthHealthcare is a significant concern for retirees, especially as they age. While Canada’s healthcare system covers many medical expenses, there are still costs that can add up, such as prescription drugs, dental care, and long-term care.

Consider purchasing private health insurance to cover these expenses, especially if you have a history of health issues or anticipate needing long-term care. Additionally, setting aside savings specifically for healthcare can help ensure you have the funds to cover unexpected medical costs.

Step 11: Think About Your Legacy

Retirement planning isn’t just about ensuring you have enough money to live comfortably; it’s also about what you leave behind. Consider your estate plan and how you want your assets distributed after you’re gone.

willHaving a will in place is essential to ensure your wishes are carried out. Without a will, your assets may not be distributed according to your preferences. Consider appointing a power of attorney to make financial and healthcare decisions on your behalf if you become unable to do so.

You may also want to think about charitable giving or setting up a trust for your children or grandchildren. These decisions can help you leave a lasting legacy that reflects your values and priorities.

Start Now, Secure Your Future

Retirement may seem far away, or it might be just around the corner. Regardless of where you are in your journey, the best time to start planning is now. By saving consistently, investing wisely, and staying informed, you can work towards a retirement that allows you to live comfortably and enjoy the fruits of your labour.

Even if you’re starting late, don’t be discouraged. Every step you take now can improve your future. Retirement planning is about making sensible choices today that will pay off tomorrow. Start with the ten percent rule, adjust as needed, and commit to your financial future. Your older self will thank you.

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.

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