For most, retiring comfortably means a life of work and diligent savings. It sounds simple, but the realities of preparing and saving for retirement may cause some to neglect it altogether. In fact, a recent survey found that 53 percent of adults don’t know how much they need to save for retirement.1
If you’re concerned about your prospects for retirement, here are six things to start doing differently right now.
Change #1: Get to Know Your Retirement Needs
The good news is that people are increasingly understanding the value of saving and preparing for retirement. About seven in 10 Canadians who are not yet retired are preparing financially for retirement, either on their own or through a workplace pension plan.
However, debt for those who are under age 65 has gone up, making saving for retirement more challenging. On average, Canadian household debt represented 177 percent of disposable income in 2019, up from 168 percent in 2018. These numbers mean that many adults have debt that exceeds their disposable income. If saving for retirement feels like too much of a challenge, focus on paying off your consumer debt first.1
Change #2: Understand Your Savings Account Options
A Registered Retirement Savings Plan, or RRSP, is a tax-deferring vehicle, meaning you won’t pay taxes until you withdraw the money during retirement. This may be a preferable option for those who believe their taxable income will be lower in retirement than it is at the time contributions are being made. Contributions made to an RRSP reduce your taxable income for the year they are made, as withdrawals are taxed instead.
The Tax-Free Savings Account, or TFSA, began in 2009 as a way for Canadians aged 18 and older to set money aside tax-free throughout their lifetime. Despite the name, the TFSA is actually more than a savings account, as it is used as an investment vehicle. Any amount contributed and any income earned in the account, such as investment income and capital gains, is generally tax-free, even when it is withdrawn.
Change #3: Contribute to Your RRSP and TFSA
Should you invest in an RRSP or a TFSA? If you have the funds, there can be benefits to contributing to both.
Choosing a tax-deferred retirement account option like an RRSP means putting off your tax obligations until retirement. While this has the potential to be an advantageous move, nobody knows for certain what their tax rate will be in the future. There’s always the possibility that you could end up with a higher tax obligation than expected.
Remember that the TFSA, in contrast to the RRSP, is tax-free, from inception to retirement. This means that investing in a combination of both retirement account types could help round out your retirement readiness.
Change #4: Avoid Early Withdrawals
By withdrawing from your retirement savings prematurely, you lose valuable principal and interest that could have been income in retirement. Additionally, you may lose valuable tax benefits and pay a tax penalty for withdrawing early. If you find that you can only contribute to either an RRSP or a TFSA, investing in an RRSP first may help maximize your tax benefits for the year contributions are made. Ideally, you’ll want to put money into an RRSP when your income level is higher, and then withdrawing the money when you’re in a lower tax bracket in retirement.
Change #5: Understanding Your Pension Plan Offerings
If you work for a larger corporation, there’s a chance you may have a pension plan. There are two different types of employer-sponsored pensions - defined benefit plans and defined contribution plans. Defined benefit plans are provided by your employer. The benefit is defined ahead of time, meaning you’ll know the amount you’ll receive monthly once you retire. As an employee, you don’t need to contribute to the pension plan, and you won’t have an individual account. This means you won’t have any say in how the funds are invested in the pension plan.
By contrast, defined contribution plans mean that the benefit during retirement is unknown, but you and your employer will contribute to this plan. Instead of being a part of a larger pension fund, you’ll have an individual account that both you and your employer will fund. You’ll also be able to decide where your funds are invested.
Talk to your employer and work with your financial advisor to make sure you understand your pension plan availability and options.
Change #6: Talk to Your Financial Advisor
One of the most impactful things you can do for your future retirement is work with a financial advisor who is familiar with your situation. They can provide you with realistic expectations, savings goals and investment advice based on your tolerance for risk. Be open and honest in your discussions, and don’t hesitate to express your fears or anxieties regarding your future retirement.
When it comes to your retirement, you must be knowledgeable, confident and diligent in your planning efforts. If you’re used to living a particular lifestyle and want to continue doing it once you are no longer working, planning ahead is critical. And if you are unsure where to start, speak with a trusted financial professional to find what works best for you and your unique situation.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.