Saving in stages
It’s never too late to start planning for your future: Why you need to manage your money for today and tomorrow
No matter your age, if you haven’t been saving for your retirement, now is a good time to start.
“It’s important to create a personal financial plan that you can stick to,” says Phil Goldband, partner at G&G Partnership in Toronto. “Do what is reasonable. Don’t shoot for the stars. Establish a regular savings amount that is doable.”
When it comes to deciding the best ways to invest, the approach you take will depend on a variety of factors. Starting with stage of life.
Early starters When you’re young, you’re saving for big purchases such as a house and your kids’ education. Young investors may want to consider a tax-free savings account (TFSA) as their first option. The contribution amount is fixed for everyone at $10,000 (up from the previous limit of $5,500) and the funds grow tax-free. A big bonus is that you can take money out of your TFSA any time without paying taxes on it, and you can replace the money the following year or in future years — the contribution room is carried forward.
A registered education savings plan (RESP) is a common choice for investors with young families.
“The beauty of this plan is that the government will pay you to contribute,” says Goldband. “For example, a $2,000 contribution will have the government providing you with a grant of up to $400 or more. Plus, it’s a tax-sheltered investment.”
Higher earners Typically, as investors become higher income earners, they also become more serious about retirement savings. At this stage, many investors are making registered retirement savings plan (RRSP) contributions to take advantage of the tax deductions when they file their taxes.
“You can save up to 18 per cent of your earned income, and if you don’t use it, you won’t lose it, so there’s room for significant savings,” says Goldband. Upon retirement, your income and tax bracket is lower, so you’ll be paying less tax on this money when you take it out. Once your money is in TFSAs, RESPs and RRSPs, you’re ready to diversify your investments any way you like. Common thinking is that younger investors with time on their side can afford to choose more aggressive investment strategies, and older investors should elect to make more conservative choices to protect their investments.
“However,” Goldband explains, “in this environment of ups and downs and political upheaval, a conservative approach may be more prudent. It should pass the ‘sleep at night’ test for you and your spouse.”
Portfolio planners The right portfolio will depend on what suits you best, taking into account things such as tax rates and diversification. Try some online tools to see where you sit, and work with an investment planner to create a portfolio that will keep your finances balanced in a way that suits your needs.
How much do you need to retire? We often hear that $1 million is the benchmark, but most analysts agree that the answer isn’t this simple. It all depends on you: your lifestyle, your health, your debt load and rates of return. The key is to work with a financial planner to find out how much you need to live comfortably and to start taking the steps that get you there.