GOOD SAVINGS PRACTICES DON’T END WITH RETIREMENT
For many people, saving for retirement is a lifelong pursuit. It begins with putting a few dollars aside each month at the start of their careers and over time depositing more substantial sums as their earnings rise.
What many don’t realize, however, is that saving behaviour shouldn’t stop at retirement. In fact, it’s more important than ever to plan carefully and invest wisely so your investments can carry you through your retirement years.
“People need to remember that they won’t need access to all of their money at once on the day they retire,” says Joe Snyder, product analyst with Tangerine Investments in Toronto. “Rather, the job is tomake sure yourmoney continues to work for you through your retirement years.”
Careful planning and good advice are essential, no matter what stage you have reached, Snyder notes. “That means setting a goal and planning your saving and investment habits around that. You need to determine when you think you will need the money, how much you’ll save each month, and the rate of return you’ll need to achieve those goals.”
Getting a clear picture of your time horizon to reach your goal (s) can help you determine what amount to set aside on a regular basis. For people in the earlier planning stages, it’s also a good time to take advantage of any company-sponsored savings plans.
Online calculators can be extremely helpful in creating “what if” scenarios that can take you through the next five, 10 or 20-plus years. For those nearing retirement, the Canada Revenue Agency website can help when working out your Canada Pension Plan and Old Age Security income, Snyder suggests. “Planning can seem complicated and vast, but some tools can help you figure out your monthly saving needs in about 15 minutes.”
If there is a shortfall, Snyder says, there are a few options: decrease your cost of living needs, consider delaying retirement, or find optional income sources, including your investment portfolio.
But finding income sources from investments isn’t easy today when yields are so low, says Preet Banerjee, a Toronto-based personal finance commentator. “As people get older, they tend to be more conservative with their investment portfolios. But in order to get more income, they have to take on more risk. There’s simply no magic solution. If you’re not comfortable taking on risk and prefer to stay with low-yielding investments, the alternative is to adjust spending and curtail your lifestyle.”
Housing can be one source of generating more funds for retirement, especially in regions where house values are very high, hesays. “There can be merit in looking at selling and renting, or downsizing and taking the difference to fund your retirement spending. I would suggest sitting down and crunching numbers first with a financial planner to see how much capital you could free up.”
Retirees should also keep in mind that too high an income during retirement could mean clawbacks from certain income supplements. “It might make more sense to put money ina [taxfree savings account] so you’re not taxed on the funds when you withdraw them,” Banerjee advises. “And just because you have withdrawal minimums for [retirement income funds] after the age of 71, you don’t have to spend it. You can always save any extra in your TFSA because there’s no upper age limit for contributions.”
As far as ratios and rules of thumb are concerned, Banerjee says it’s all up to the individual and the lifestyle they choose. “There’s one rule that says you need to replace 70% of your income in retirement. But everyone’s situation is totally different. Do you want to travel the world or tend your garden at home? The costs of those lifestyles are vastly different.”
One last thing to bear in mind is that expenses can ebb and flo was you age. People may spend more in their early retirement years while they are fit enough to engage in activities. Expenses begin to curtail at a certain point as lifestyles become more sedentary, then increase as health care needs increase.
Perhaps the simplest advice in achieving a comfortable retirement is making sure you save when you can, whether you’re 20 years of age or 80. “You don’t have to spend whatever dollar amount that comes into your door each month,” Banerjee says. “You can always choose to keep on saving for a rainy day.”