Looking for information on retirement planning? You’ve come to the right place!
I’m a financial advisor based in Hamilton, Ontario. Building retirement plans is a big part of what I do. I know what it takes to succeed.
Now here’s the best part: I’m going to share my success secrets with you!
I’ve discovered 10 tips to get your retirement plan on track. So if you’ve been saving for a while, or just starting out, these tips will get you on track and keep you on course.
Sound good? Let’s go!
Retirement Planning Families Can Trust
Before we start, you might be wondering: Is retirement even possible for me?
Absolutely!
2020 was an incredible year: COVID-19, volatile markets, political turmoil. So you might think retirement is impossible right now.
But here’s the thing: Life goes on. People will graduate from school, start careers, get married, buy houses, have kids, take vacations – and think about retirement.
In fact, a couple of recent surveys provide some good news. Despite all the turmoil, people were able to retire. And they retired earlier than expected.
One survey showed that people greatly under-estimated their ability to retire before before the age of 65:
Pre-retirees: Percent who think they will retire under the age of 65: 37%
Retirees: Percent who actually retired under the age of 65: 74%
Source: 2020 Retirement Survey. Fidelity Investments
Another survey showed that retirees leave the workforce earlier than most people expect:
On average, retired Canadians actually left the workforce at age 57, five years younger than the planned age estimated by currently working Canadians.
Source: Retirement Reality Check 2020. Mackenzie Investments
How did these retirees do it? To start, you need to think of retirement planning as a journey. And like any journey, it’s good to have a map.
Which brings us to tip #1:
1) Have a written retirement plan
The first step to retirement planning is defining your goals. After all, how do you know if you’re on track if you don’t know where you’re going?
According to a CIBC poll, nearly half (46 per cent) of Canadians do not have a financial plan, even though many people feel concerned about their retirement years.
If you don’t have a plan, now is the time start. Don’t worry: It’s not all hard work.
Have some fun. Do some daydreaming.
Start off by asking yourself: “What would I do with my time if I never had to go back to the work again?”
- Would you travel the world or spend more time with your family?
- Would you take up bird watching or join an exclusive golf club?
- Would you do volunteer work or start a side business?
Questions like these help you create a mental picture of your retirement. More importantly, write it all down. This will make your goals more concrete and more likely to be achieved.
After you’ve defined your retirement goals, the next step is to to look at some numbers. For example, spending more time with your family is cheap. Cruising the Mediterranean every year for a month is not.
For retirement planning Hamilton families can rely on, use a trusted financial advisor. There’s also some good retirement calculators available online to help you crunch the numbers.
2) Build around your pension plan
Many people have employer pension plans, so you need to include them in your retirement plan. The type of pension you have will impact how you build the rest of your retirement plan.
Most government workers have a defined benefit (DB) pension plan. Most other workers have a defined contribution (DC) pension plan.
A DB pension plan means your employer promises to pay you an income for the rest of your life when you retire. The more years you work, the bigger your pension cheque becomes.
A DC pension plan means your employer gives you a dollar amount each year, and that money is invested in an account in your name. The more years you work, the more money goes into your retirement account.
In Canada, pension plans are a hot button topic. Some people are adamant that DB plans are better than DC plans (i.e. getting a monthly cheque is better than having money deposited into an account). That’s not entirely true.
No pension plan is perfect, and both plans have their pros and cons. The bottom line is that both types of plans can help you achieve your retirement goals.
3) Use tax advantaged plans like RRSPs and TFSAs
Tax advantaged plans like RRSPs and TFSAs are great savings tools for Canadians. You need to use them to their fullest advantage.
Registered retirement savings plans (RRSPs) make a lot of sense. Why? Because many Canadians are in a high tax-bracket.
Contributing to an RRSP plan reduces your taxable income and lowers your tax bill for the year. The drawback is you need to pay taxes when you take money out of your RRSP. But if you plan things right, you’ll be in a lower tax bracket when you start to draw on your RRSP.
Tax free savings accounts (TFSAs) are also great for Canadians. You don’t get a tax reduction when you make a contribution to a TFSA. But your savings grow tax-free while in the account. There’s no tax on any withdrawals, and you can always put the money back into the account.
4) Consolidate plans from any previous employers
Work has certainly changed from a generation ago. Gone are the days when an employee would work their entire career for one employer. Today’s workers are likely to have three or more employers over their careers.
As a consequence, you’ll likely accumulate several saving accounts from different employers. These “orphan accounts” can create a lot of problems:
- you might lose track of your money
- the investments might not be suitable anymore
- the beneficiary designation might be out of date
When moving to a new job, merge your old accounts in one place. Moving retirement accounts can almost always been done without incurring tax.
So if you have multiple RRSP accounts, merge them into one account. If you were part of a group pension plan, use a locked-in retirement account (LIRA) to move the money into an account in your name.
Saving Strategies for Retirement Planning
The following savings strategies will get your money working harder for you:
5) Start early to increase the power of compounding
When it comes to saving, compound interest is a powerful force. Compounding happens when earnings on your money starts to generates earnings of its own. It’s like a bonus for starting to save sooner rather than later.
Canadians can leverage the power of compounding by saving as early as possible. Even saving a small amount can have a dramatic effect on how much you accumulate at retirement.
The phrase “Get your money working for you.” is related to compound interest. It means that after a while, your money will start to grow on its own, rather than you having to dump more money into your account.
So if you start early enough, your money will do most of the saving for you through compound interest. If you start late, you’ll have to do more of the saving yourself.
6) Take advantage of employer matching
Who doesn’t like free money?
Many employers offer savings plans with a company match. Examples include group retirement plans, RRSP plans and stock purchase plans. Employers generally match contributions up to a certain percentage or dollar amount.
If possible, contribute the maximize to get the full employer’s match. The extra money from your employer can add up over time and help you build your retirement savings.
I’m amazed at how many people I meet who don’t take advantage of this perk. (This is free money people!)
7) Get your raise or bonus working for you
Okay. I understand.
Your job hasn’t exactly been a cash bonanza lately. Raises and bonuses are few and far between.
But things are starting to improve, so the cash is starting to flow again.
It’s important to have a plan for that extra cash. As we’ve seen, even a small increase in your savings can have a dramatic impact on your final nest egg.
Portfolio Strategies for Retirement Planning
Make sure your investment plan includes these portfolios strategies:
8) Understand market volatility and long-term performance
If you want your savings to grow, you need to invest a chunk of your money in the stock market. Stocks have historically outperformed bonds and cash over the long term.
Over 50 years in Canada, here are the average annual returns for stocks, bonds and cash:
Stocks: 9.3%
Bonds: 6.0%
Cash: 2.8%
Source: CI Investments.
Now before you sink all your money into the stock market, you need to understand one thing: Stock market returns are volatile!
In fact, stocks can be very volatile in the short term. Here’s another perspective: Let’s scrap the averages and look at the year-to-year stock market returns.
Hey… Where did that 9.3% return on stocks go? Great question.
Sure the average returns look great. But on a one-year basis, the historical returns on the S&P/TSX Composite range from minus 33% to plus 40%. Talk about volatility!
Looking at the table, you can see the risk of jumping in the stock market for only one year. That’s why you should always invest in the stock market for the long term.
Negative years are usually followed by positive years. So you can reduce the chance of a loss if you stay invested longer than one year. And if you stay invested for a really long time, the chances of achieving the long term averages on the stock market are greatly improved.
9) Diversify
Even though stocks outperform over the long run, most people need to diversify their savings. Why? Because the stock market is too volatile for most people.
Again, long term averages look great. But humans live from day to day. So it’s natural for us to watch our savings every step of the way.
When it comes to money, we sometimes act irrationally. Long term averages are meaningless if we abandon our plan at the first sign of trouble.
Diversification is a strategy that helps you stay committed to your long term game plan. Diversification means holding more than one type of investment, like stocks, bonds and cash.
Not all investments react the same to changing economic conditions. So a diversified portfolio reduces volatility. The top performing investment in one year can be the worst performing investment in the following year.
Having the right mix of investments will protect you from a major downswing in any one investment. It will also keep you on track toward your long-term goals.
10) Rebalance your portfolio
Over time, different investments will produce different returns. So your portfolio might drift away from the investment mix you chose for yourself. That’s why you should review your portfolio regularly to see if it’s still invested according to plan.
When your investment mix drifts away from its original target, you should rebalance back to your long term plan. That means buying and selling certain investments to get back to their targets.
The beauty of rebalancing is that it forces you to adopt the golden rule of investing: buy low, sell high.
For example, if the stock portion of your portfolio has grown significantly, rebalancing will force you to sell some stocks. This in turn will force you to buy some more under performing investments. This is the definition of buying low, selling high.
When the investment rankings rotate (like we’ve seen in the table above), your portfolio will be in a good position to benefit.
Conclusion:
I love sharing my pro tips on retirement planning! Whatever your goals are, it’s important to have a plan to make them a reality.