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As the baby boomer generation prepares to leave the workforce, people all across Canada are thinking about their retirement savings. You want to be able to live out your golden years with financial stability and peace of mind.
So how do you properly prepare to retire comfortably? Here are eight tips to keep in mind when planning your retirement.
Start saving as early as you can. If you’re in your 20s, you think you have all the time in the world. However, the years can sneak up faster than you think, and you want to build the biggest nest egg possible.
Your 20s are actually the perfect time to start saving. But don’t worry if you’re older and haven’t put away as much as you should have. You might have some catching up to do, but even small savings are better than none.
If you do need to catch up, start by slashing unnecessary expenses. Make coffee at home instead of going to expensive shops, or cut back on entertainment. Put away as much as possible while you can.
You might not like giving up some luxuries now, but you’ll be glad you did when you retire and need the money you saved.
You can find various guidelines for how much money you’ll need to retire. Many sources list an estimate of one million dollars. However, this figure doesn’t fit everyone.
To figure out how much you should save, you need to assess your spending habits and think about the kind of lifestyle you want in retirement. Do you want to travel a lot, or would you prefer to stay home and enjoy your family? Are you accustomed to a higher standard of living and want to maintain it?
Be honest with yourself about how you want to live after retiring. You won’t do yourself any favours by thinking you can live on less than you actually can.
Once you understand your spending habits, you should think about how long you’re likely to live. Are you currently healthy? Do you have an active lifestyle? Take a look at your older family members’ lifespans, especially parents and grandparents.
If you expect to live into your 90s or beyond, then you’ll need to save enough to accommodate a long life.
Get a Financial Advisor
Many people find retirement accounts confusing. When you’re trying to decide what type of account will work best for you, you need a financial advisor to help you navigate the tax system.
Find a good advisor who can explain your options and help you manage the best account for your needs. There are two main types of retirement accounts:
Registered Retirement Savings Plan (RRSP)
An RRSP is a tax-exempt retirement savings plan registered through the Canada Revenue Agency. You put money in the account and as long as the funds stay in the plan, you don’t have to pay taxes on them. However, you do have to pay taxes when you start to make withdrawals from your account.
Tax-Free Savings Account (TFSA)
A TFSA is a registered savings plan that allows you to earn investment income free of taxes. Withdrawals from a TFSA are also tax free.
You can have both a TFSA and an RRSP.
Pay Off Your Debt
Before you can start seriously saving for retirement, you need to pay off all your debts. If you can be debt-free sometime in your 50’s, you’ll be in a good place. Pay off your mortgage, cars, and any consumer debt.
If you’re paying for your children’s college tuition, see if they can work part-time to help lessen the burden on you.
See What Your Company Offers
Don’t pass up free money. Many companies offer match programs for RRSP accounts. This means they’ll match whatever you contribute up to a certain limit. The money will come out of your paycheck automatically.
Even if you’re starting an RRSP while you’re still young, you should still contribute at least as much as your employer will match.
Work If You Can
If you’re in good health when you retire, you can preserve your retirement savings by working part-time. You should still save as if you won’t be able to work. However, a little extra income will help your savings last longer.
Don’t put most of your investment portfolio into bonds, even after you retire. Inflation over time can decrease bonds’ buying power. Stocks are better for long-term returns.
Draw From Multiple Accounts
When you retire, don’t go through all the savings in your non-retirement accounts before switching to your registered accounts. Instead, draw from both.
This is especially important if you have an RRSP. When you begin withdrawing money from your RRSP, you have to pay taxes on it.
If you withdraw a little from both your regular savings accounts and your retirement accounts, you will have a smaller tax bill overall than if you go through all your regular savings first and rely exclusively on your RRSP.
It’s never too late to start saving for retirement. With these tips and a good financial advisor, you can enter your golden years with confidence.
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