In Canada, a vast majority of people spend up to 30 years in retirement. Bearing this in mind, a solid retirement plan is crucial in ensuring a sound and secure retirement.
Shockingly, a survey commissioned by the Ontario Securities Commission established that 56% of Canadians over the age of 50 do not have a retirement savings plan.
The survey, which polled 1,471 Canadians, found 22% of respondents across Canada haven’t started to save money for retirement. Among pre-retiree respondents who have a retirement savings plan, around a third (31%) feel they’re behind in their plan.
For hardworking Canadians who clock at least eight working hours a day, retirement should mean relief. It should offer adequate time for you to check off as many adventures on your bucket list as possible. Setting aside some money during your youth might not seem much until the ‘magic’ of compounding comes into play.
Start saving for your retirement fund as soon as possible. This is because early savings allows your investment portfolio to tolerate higher risks and this can enable you to take advantage of the power of compounding. Listed below are retirement investment strategies that everyone should consider.
Understand Your Time Horizon
Your time horizon is the length you expects to hold your investment for a specific goal. The longer your time horizon, the more aggressive, or riskier a portfolio, you can build. The shorter the horizon, the more conservative you’ll want to be. Your horizons will significantly influence the kind of investment strategies that you should consider. Investments can broadly be categorized as either aggressive, highly risky and volatile, or more conservative. Highly volatile investments like stocks promise high returns; however, there is also a chance that the market can pull back, thus eroding the value of your investment. With a longer time horizon, however, the market can recover and may even surpass your forecasted goal..
Riskier investment portfolios suit youthful investors with more years of working, saving and investing ahead of them. Longer time horizons also allow you to factor in inflation in your planning in order to maintain your purchasing power when you retire. By factoring in the time horizon, older investors would go for more conservative alternatives while youthful investors would choose more volatile options considering the room that they have to tolerate mistakes and corrections.
Determine Your Retirement Spending Needs
After establishing your time horizon, it is important to determine the amount of money you will need to comfortably retire.
When asked whether they know how much money they’ll need to save to pay for retirement, 38% of respondents in the aforementioned survey claimed that they have no idea, while 49% said they have a rough idea what they’d require. Just 13% of pre-retiree respondents said they have an accurate estimate of the amount they’ll need to return comfortably.
This is a crucial step since you don’t want to run out of money when you are no longer productive. To do this, ensure that you are as realistic as possible and consider all the likely and unlikely scenarios before coming up with a definite figure. Most people are led to believe that their retirement expenditure will only account for about (70-80) percent of their pre-retirement income.
While this should be the case, more often than not, some people retire with sizable mortgage balances and a burning desire to travel the world. In the unlikely event that they develop a serious chronic illness, they start to incur unexpected medical expenses. Before they know it, their retirement funds will be depleted. The best way to determine your retirement spending needs therefore, is to consider a ratio close to 100% of your pre-retirement expenditures. This will help cater for the increasing cost of living and other unforeseen expenditures. The surplus should be enough for you to enjoy a little luxury—perhaps to indulge in travel or other hobbies.
Assess Your Risk Tolerance and Investment Goals
Doing this will involve taking a long look into your retirement goals, assessing your risk tolerance and determining if the two match. In the long run, this will boil down to the amount of risk that you are willing to take in order to achieve your objectives. Your investment portfolio and asset allocation should balance your risk tolerance and return objectives. Saving alone will not help you, you might need to take on certain risks in order to achieve your investment goals within your time horizon. You must be patient with your investment and avoid backing out at the first signs of failure.
Choose an Investment Account: RRSP vs TFSA
Both the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) are designed to help you save for retirement and save on tax while you’re at it. For TFSA account, you’ll contribute to your retirement fund from your net income, which means that the contribution will not be taxed again during withdrawal. You get an allocation of up to $6,000 per year for your TFSA. Although you won’t get any tax breaks while contributing to a TFSA, all proceeds will not be subject to capital gains tax upon withdrawal.
On the other hand, an RRSP account allows you to save up to 18% of your gross income annually. This is money that you won’t be paying income tax for during your contribution. This plan allows you to defer paying taxes until retirement when you will likely be in a lower tax bracket compared with when you were employed. Both plans afford you the opportunity to save on tax. Even so, the suitability of either of the plans depends on several factors, including your investment period and amount of income.
Determine the Best Asset Allocation for your Age
Major income-producing assets like stocks, derivatives, bonds and real estate present different degrees of risks and returns as they shape up differently over time. It is for this reason that it is important to determine the best asset allocation for your age in order to avoid missing out on your retirement financial goals. By subtracting your age from 100 (for instance), you can determine the percentage of your portfolio that should be invested in equities, bonds and cash.
Maximize Employer RRSP Contributions
Most Canadian employers (~84%) match their employees’ RRSP contributions. They contribute anything between 25–150% of what the employees contribute. If offered, ensure that you maximize your contribution in order to fully enjoy this benefit and grow your retirement savings. Don’t leave money on the table!
Automate Your Investments
Technology has made it possible for people to automate their investments and go about their day-to-day lives without worrying about them. Retirement and brokerage accounts for instance, are popular investment accounts for you to make automated investments.
Are Strategic Retirement Investments Necessary?
Strategic savings and investment are indispensable in building a solid retirement fund. You just can’t wing it when you’re on a fixed income. In fact, you can’t wing it at any age! Get a plan, save, invest and sit back to enjoy the memories with your loved ones. If you have any concerns, reach out to the wizards behind MoneyWizard.ca—we’ve got a plan for you!