Plan for retirement
It's not at what age you'll retire, it's at what income.
Today most Canadians expect to be living longer than ever before – up to 20 years more. All the more reason to start planning right now for how you'll pay for retirement. Here are some basic tips to get you started.
According to conventional thinking, senior citizens like Mick Jagger and Rod Stewart should have hung up their microphones and started perfecting their shuffleboard technique years ago. But that's not the case any more – for rock stars or even regular folks. Projections by Statistics Canada indicate a 35 year-old man has a 25% chance of living past 85 and a 35 year-old woman has more than a 25% chance of living past 90. Not all of us can fill an arena at age 70 (with the income that provides), so it's crucial to get your retirement strategy on track as early as possible.
1. Start an RRSP.
Registered Retirement Savings Plans remain one of the best retirement investments available. Your annual contributions are tax deductible and dividends, capital gains and interest are all tax sheltered. You only pay taxes when you withdraw the money; in theory in retirement. And ideally at a lower rate than during your peak earning years. If your employer has an RRSP program, be sure to participate.
2. Contribute early.
Start as early as you possibly can. Even if it's not much at first, those contributions you make in your 20s – before mortgage payments and child expenses come along – can become a significant nest egg by the time you reach retirement. And even in those years with heavy expenses, still contribute, even if it's a modest amount.
3. Contribute monthly.
Many people still wait until the February/March deadline, but tax-sheltered compound interest can make a dramatic difference, so try to contribute monthly. It's likely easier to have your contribution automatically transferred from your bank account every month. Aside from the convenience, if you're investing in mutual funds, you'll benefit from dollar-cost averaging. This reduces the effects of market volatility; you buy fewer units when prices are high and more when prices are low.
4. Contribute the maximum
It's worth getting your maximum tax break by contributing your limit. You can contribute 18% of your last year's earned income up to a limit that increases annually ($24,930 for the 2015 tax year). Your allowable amount will be listed on last year's tax assessment. If you don't have any available cash, consider an RRSP loan; the interest cost will likely be more than outweighed by the compound growth over time. You can also carry forward any unused contribution room.
5. Invest for the long term.
The key to building long-term wealth is to be a long-term investor. This requires patience and discipline. Don't let day-to-day market fluctuations distract you from your long-term objectives. Unless you're closing in on retirement, you've got time on your side.
6. Designate a beneficiary.
If you should die, your RRSP will go into your estate and be subject to probate and other fees. Designating a beneficiary avoids all that. If you name your spouse, your RRSP can be transferred into theirs tax-free. Talk to your financial advisor about all the implications when designating a beneficiary.
By holding different types of investments, you can protect your RRSP against market fluctuations in any one category. Inflation can eat away at conservative investments, so consider diversifying into some growth-oriented securities. You're allowed to invest up to 30% of your RRSP in foreign holdings. Given that Canada makes up only about 3% of the world's markets, this gives you a much wider (but not always easier) choice.
8. Create a spousal plan.
The spouse with higher income can contribute to the lower income spouse's RRSP and still receive the tax deduction. The real benefit comes at retirement, when the money withdrawn will be taxed at the lower income spouse's rate. This is an excellent way to income split and reduce your combined tax rate in retirement.
9. Consider a TFSA.
TFSAs provide a tax shelter for income generated by investments. Although there is no immediate tax deduction; unlike RRSPs, you won't be taxed when you withdraw funds. The TFSA can provide a nice complement to RRSPs, providing a tax shelter if you've maxed out on your RRSP contribution.
10. Get expert advice.
A solid retirement strategy is an integral and essential part of an overall financial plan. This is a key area to get professional advice from your financial advisor.