Wondering how to start saving money for retirement in Canada? Millennials thinking of retirement planning often face a unique set of challenges today. With lower earnings, rising housing costs, and increasing childcare costs, it all means there’s less money to save for retirement. But planning for retirement in Canada is still possible if you make it a crucial part of your financial planning.
The biggest challenge for most millennials is the many unanswered questions surrounding the amount you should save, when you should start saving, and how to save money for retirement. If these questions have kept you from starting your retirement planning, consider these smart retirement planning tips:
At What Age Can You Retire in Canada?
First, determine at what age you’ll want to retire; this will give you a timeline to work with for saving. For most people, 65 is considered ideal, but that’s no longer the standard anymore. According to Statistics Canada, 13% of the workforce in 2015 was aged over 65. There’s no “right” retirement age; it’s a personal choice only you can make.
Whether you’re planning to retire early or past 65, your choice makes a difference in how long you have to save for your retirement. Give it some thought before making a decision. You can always make adjustments later.
How Much Do You Need to Retire in Canada?
Aclear timeline for retirement planning makes it easier to calculate exactly how much you should be saving for retirement. To come up with the right rate, you need to estimate your overall retirement income and then work backward using a reasonable return rate.
A good rate to start with is 10% of your net income. Of course, what you plan to do after retirement will also determine how much you’ll need to save for retirement. Do you want to travel or live a quiet life after retirement? Estimate your future cost of living, subtract government benefits, and adjust for income tax and inflation. There are handy tools on the Internetto make the math easier.
When Should You Start Saving for Retirement?
The sooner, the better. This is especially critical for millennials who are more likely to switch their jobs or be underemployed or unemployed at some point in their careers. Don’t wait to start saving for retirement until you’ve achieved your major life goals like parenthood and home ownership. Start now, no matter how small the amount is. The earlier you start saving, the less you’ll have to save overall, thanks to the compound interest you get from your savings.
How Can You Save Money for Retirement
With a good idea of how much and how long you need to save, let’s look at how you can save money for retirement. The Government of Canada offers two types of registered accounts that you can save your money for retirement. These accounts come with benefits that help alleviate some tax burdens on your money. They are:
- Tax-Free Savings Account (TFSA) – With a TFSA account, you can contribute up to $6000 per year from when you turn 18. Your savings grow tax-free and can accumulate if you don’t use them, even if you’re opening a TFSA account the first time. There are no taxes, fees, or penalties when you withdraw your savings.
- Registered Retirement Savings Plan (RRSP) – An RRSP account lets you contribute up to 18% of your previous year’s income. There are no taxes on contributions, and you get an income tax refund in the years you contribute. However, you’ll pay tax when you withdraw your contributions. This account is ideal if you earn more now than you plan to in retirement.
Where Should You Invest Your Money?
Simply choosing whether you save your money in an RRSP or TFSA account isn’t enough. You should decide how to invest your savings. A smart investor uses long-term saving strategies that are proven to work. There are three main retirement investment options for Canadians:
- Mutual Funds – These are pools of savings managed by a professional money manager who invests the money on your behalf to make it grow. This is the most popular option in Canada.
- Robo Advisors – Robo advisors are a great option if you’re looking for a financial investment product online and want a low-free, minimal-effort investment portfolio that will earn you sufficient interest to make retirement a reality. Learn more about Canada’s Robo Advisors.
- Discount Brokerages – This is more of a hands-on approach option for those who want to manage their investments themselves without an investment manager’s oversight. This investment option allows you to buy and sell securities yourself.
Conclusion
You might be asking yourself this: How about the Canada Pension Plan? Financial experts advise that you should consider your government pension plan as a supplement and not a significant source of income for your retirement income plans.
Planning for retirement can be daunting. So rather than obsessing on how and where you’ll save your money, start planning today. Embracing a saving culture for the future is the most important part of the process.
Photo Credit: Pixabay (both)
Canada for retirement? The winters are waaaaaay too cold for me!
Me too, Joe.