It’s never too late to start planning for retirement. However, the sooner you start saving and putting your finances in order, the better off you’ll be when you decide to enjoy your golden years.
How Much Do You Need to Retire?
Even if you downsize your lifestyle, you need to save enough to pay for your expenses during retirement. Without going into all of the calculations, most experts agree that it comes down to 10 to 15% of your pretax income. If you need a starting point, this is a good place to begin.
This works out unless you’re a really late starter, and then there are things you can do to make sure you’re ready for retirement. What does your best life look like in retirement? Are you still working? Are you spending time at home with the kids and grandkids? If your dreams take you far afield for traveling and adventure, you’re going to need a much bigger safety net.
Use a trusted retirement calculator to figure out how much you need to retire. This gives you a realistic view of your options.
Pay Off Your Debt
If you have any debt, besides your mortgage, work on a plan to pay it off as soon as possible. In most cases, the interest rate on debt exceeds the rate of return on retirement investment options. For most people, income drops dramatically after retirement. Carrying credit cards and high-interest loans into your golden years puts you at a great financial disadvantage. A financial advisor can help you take an honest look at your finances and formulate a plan to pay down or negotiate your debt.
Invest in Tax-Advantaged Accounts
Once you’re debt-free, with the exception of your mortgage, it’s time to strategize your saving efforts. Many financial advisors recommend funding an emergency account of at least $1,000 — ideally, three to six months of living expenses — before ramping up your retirement savings. Roth IRAs are great if you’re in a lower tax bracket than you expect to be in during retirement. Tax-free savings accounts (TFSA) are ideal for Canadian citizens.
Whatever you decide on debt payoff and an emergency fund, get serious about maximizing your retirement savings.
Diversify Your Investment Portfolio
Wherever you put your money for retirement, you should spread your money evenly between the following asset classes:
- Growth and income
- Aggressive growth
You can look at the track record of funds to determine the overall growth rate over the past 10 to 15 years. Keep in mind that stock values can waver on a minute-to-minute basis, so short-term performance isn’t always a good indicator of potential growth. Again, the advice of a reputable financial advisor can help you determine your risk profile so that you can confidently choose the diversified funds that work for you.
Note: Investing is a personal choice. It depends on your goals and how risk tolerant you are. Everyone has different strategies. Because there are so many funds to choose from, reaching out to an investment professional gives you a sense of your options and possible choices that meet your goals. Don’t let anyone pressure you into an investment fund or vehicle you aren’t 100% comfortable with.
Invest in Real Estate
Buying a rental property is a great way to turn your idle cash into passive income. However, there are important guidelines. Stay local and make sure that you have an emergency fund to cover repairs and maintenance on your investment property. Although dropping cash on a property can be a scary prospect, real estate typically gains value over time and can make a great investment if approached cautiously. Choose a real estate professional with plenty of experience and a great reputation to help you find what you’re looking for.
Registered Retirement Savings Plans (RRSPs)
A Registered Retirement Savings Plan (RRSP), as the name suggests, is a way for you to save for retirement. RRSPs allow you to grow your money and save on taxes. you can get an income tax deduction, depending on the amounts you contribute and your income. You don’t pay taxes on the money as long as it stays in the RRSP account. The deduction limit is typically 18% of earned income.
Automate Your Savings
It’s a good idea to make your retirement contributions automatically before you have a chance to miss (or spend) the money. Some employers will automatically deduct money from your paycheck and deposit it into your retirement savings vehicle. You can also set up your bank account to do this automatically as soon as your check is deposited. This strategy can help you build a nest egg and pay yourself first.
Cut Back on Expenses
If you don’t have a budget, now is the time to make one. Analyze your budget and see where you might have some room to lower costs. You can start by negotiating for a lower rate on things like car insurance. Keep your goals realistic and sustainable. For example, if you buy lunch every day, start by packing lunch one or two days a week and putting the money aside for your saving goals.
Getting a Reverse Mortgage
A reverse mortgage can help you get money without losing your home. The loan amount is secured by the equity in your property. Usually, you don’t have to make payments until you move out of the house, sell it or pass away. if your goal is to leave a legacy behind for your loved ones, this could greatly reduce your estate. However, if you haven’t been able to meet your retirement goals or started saving very late in life, this could be a viable choice. Be sure to talk with a professional before making a final decision on this and any other financial choices that could impact your future.
When it comes time to save for retirement, it’s important to realize that’s there’s a risk no matter where you put your money. As long as you use prudence and care, you should be able to improve your savings and build a nest egg for a comfortable retirement.
About the Author
This article comes from our friends at WealthSimple. The author Greta Scribe holds a degree in Journalism and has completed an MBA. She is a Real Estate Broker and financial planner, who also teaches online coursework for fun. The opinions expressed in this article is of the author and does not necessarily represent official Value Stock Guide opinion.