Investment advice today is plentiful, sometimes free – and often confusing. You read one thing in the news and you find a contradictory article online. Ask Bob in accounting how his stock market dabbling paid for that tropical vacation home and your investment advisor will tell you to do the exact opposite. That’s because everyone’s circumstances and retirement goals are different: there are guides, not rules. But there is one constant: it’s never too early – or too late – to start planning for retirement. Here we provide tips you can follow at every age to ensure that ultimately you retire from your career, not your lifestyle.
The Starter 20s
Some 20-somethings might wonder how they can start saving for retirement when their idea of extravagance is brand-name ketchup on their boxed macaroni. But even they can begin saving. Janet Petonjic-Rogers, manager of deposit services for Bridgewater Bank (a wholly owned subsidiary of AMA) in Calgary, explains: “It’s been proven time and again that you should start saving when you’re in your 20s, even if that’s when you’re least likely to think about it.”
That’s because in many registered products and savings vehicles, you are guaranteed a certain percentage of interest. When that interest is compounded (monthly or annually), you earn interest on the interest. So, for example, if you were to invest $4,000 a year starting at age 20, and receive an eight per cent average annual return, by the time you were 60, you would have more than $1 million saved. If you waited until you were 32, you’d have to invest around $10,000 a year for the same result.
So where should the young investor begin? One option is a basic high-interest savings account (usually with rates of around two per cent to four per cent). “You can start out with as little as $25 a month. The interest is calculated at the end of the month and it is usually compounded,” says Petonjic-Rogers.
If you have a Registered Retirement Savings Plan (RRSP) at work, don’t give it a second thought: sign up. These tax-deferred plans are registered with Revenue Canada and can also be set up through your financial institution. A range of investments can be placed in RRSPs, including mutual funds (more on these later), bonds and stocks. Once you put money into an RRSP, consider it locked away until you retire – if you cash it early, you’ll pay tax on the withdrawn amount.
The 20s are also a perfect time to open a tax-free savings account (TFSA), to which you can contribute up to $5,000 annually. As with RRSPs, you can choose from a range of investment options under the TFSA umbrella, including mutual funds, guaranteed investment certificates (GICs) and bonds. The benefit here is that your money is still accessible, since withdrawals are tax-free – and the earnings are, too. Contributing $200 a month to a TFSA for 20 years, with an annual return of 5.5 per cent, will accumulate $11,045 more than if the money had been in a taxable product. (For more on the benefits of TFSAs, see the Government of Canada calculator at TFSA Calculator).
In your 20s, you might want to lean toward higher-risk products with higher potential returns; stocks, for example. After all, if it doesn’t go well, you’ll have decades to recover. But then again, if $5,000 is all you have to your name, you may not want to risk your principal. It comes down to your tolerance for risk.
The Building 30s
By this time, the boxed macaroni on the 30-somethings’ table has likely been replaced with some homemade mac and cheese, topped with romano and paired with a pinot noir. Likewise, the 30-year-old’s investment strategy should also be raised a notch on the sophistication scale. “In their 30s, people tend to be more serious and knowledgeable about what suits their needs,” Petonjic-Rogers says. “But they also may be buying a home and carrying other debts.”
At this age, it’s tempting to put all of your energy into paying down a mortgage. But as the last few years reminded homeowners, a house is not a fail-safe investment, and the best defense against downturns and economic upheavals is a diversified portfolio. “Don’t put all your eggs in one basket,” Petonjic-Rogers cautions. So, if you haven’t done so already, this is an ideal time to sit down with an investment advisor and learn how to diversify, as well as work out how much money you’ll need for retirement. The industry standard for the amount you need is 70 per cent of your income – so if your household income is $100,000 a year, your pensions and investments need to provide $70,000 a year.
But like all rules of thumb, there are differing opinions (a few recent studies point out that people who live in less expensive cities or have different retirement goals may not need as much). The bottom line: your retirement is in your hands, and nothing beats the advice of an expert, who will go over your goals and situation and help you get where you want to go.
“Sit down and create a list of your top five goals,” Petonjic-Rogers says. These may include being mortgage-free, reducing your work hours to part-time or buying a vacation home or RV. Whatever it is, if you plan for it, it’s more likely to happen.
Another good starting point for working out how much you need to retire is Service Canada’s retirement calculator, at: Retirement Calculator
The Stable 40s
At this stage, retirement is closer on the horizon, and many people can develop a more realistic vision for their post-work life. If you haven’t already done so, you may consider placing money in mutual funds, which is a diversified way to play the stock market. In these funds, professionals manage the money provided by a pool of investors and buy into areas that are typically considered higher-risk and higher-return, such as stocks and bonds. Because a group of people contribute and the money is placed in a variety of places, it’s considered safer than buying individual stocks.
This is also a good time to re-evaluate the plans you made in your 30s. No one has a crystal ball, and your vision of retirement at 31 may be very different than when you’re 45: maybe you decided to go back to school or buy a bigger house.
The Return-to-Caution 50s
Over time, early retirement has become more common. According to the federal government’s Department of Labour, between 1987 and 1990, 29 per cent of Canadians retired before the age of 60. Between 1997 and 2000, that rate grew to 43 per cent.
However, investment decisions can make or break retirement plans: the recession of 2008 convinced a third of baby boomers to postpone retirement for at least a year, according to a 2011 Conference Board of Canada survey.
A market downturn is far more perilous to a 55-year-old investor than to one aged 45 or 35. This is why many people begin to further diversify their portfolios into stable products to avoid unwelcome surprises. “At the age of 55, you typically see about 30 per cent of a portfolio in GICs, which offer a guaranteed rate of return and will always preserve your principal, earning interest at a fixed rate (or a variable rate according to a predetermined formula), and the rest is in a registered product,” Petonjic-Rogers says. “You see a general trend to move out of the high risk products into more secure products.”
This is also the time when you want to get serious about paying off debts, such as your mortgage. Because at this time, the only fees you’d like to be paying are green fees.
The Hunkered-Down 60s
Ideally, by the time an investor is a (blank), financial planning mainly involves avoiding surprises and pinpointing the exact date retirement can occur.
“A lot of people in this category want stability and peace of mind,” Petonjic-Rogers says. “They don’t want to be wiped out by the market. So even if interest rates are low, they want to know they will always have X amount of money available.”
At some point in your 60s, you will likely want to convert your RRSPs into a Registered Retirement Income Fund (RRIF). (The conversion becomes mandatory at age 71.) RRIFs are tax-free accounts that allow unlimited withdrawals and require a percentage of withdrawals annually, which are taxed as income.
If you didn’t start planning until later in life, it’s not too late. There are still decisions that can make for a more comfortable retirement. Working a year or so longer than you originally planned may help pay down remaining debts, create a financial cushion and forgo any drawbacks from drawing on your Canada Pension Plan (CPP) benefits before you hit 65.
The CPP is a monthly benefit paid to individuals over 60 who have made a contribution to the program during their working years. In January 2011, changes to the plan were instituted. Among other adjustments, you now can choose to start receiving your CPP benefits at age 60 instead of 65. If you do so, you’ll receive smaller payments. So how do you decide when to begin drawing? If you work until you’re 65, it seems advisable to wait. However, if your health is not good, or you know you can receive the Guaranteed Income Supplement (GIS),which causes a reduction in CPP payments, you may want it earlier. For complete details on the CPP, visit: CPP
The Benefits of Investing Young
Jane Doe starts investing at age 25. she puts $100 a month, into an RRSP until she turns 65. If her savings earn 5% in interest annually, she will retire with $144,959.73
John Doe starts at age 35, also putting $100 a month into his RRSP at 5% annual interest until he turns 65. He retires with $79,726.62