Week 15: Investing For Your Retirement
MONEY SMART CHALLENGE
Money Smart Weekly Conversation Fact: Many Canadians are not doing enough to secure their retirement. Only 20% of middle-income Canadians, retiring without an employer pension, have saved enough for retirement.
Canadians’ retirement savings ‘wholly inadequate’ February 16, 2016
An Analysis of the Economic Circumstances of Canadian Seniors, by statistician Richard Shillington of Tristat Resources and released by the Broadbent Institute, found that, among this age group, 32 per cent have less than $1,000 in retirement savings, 23 per cent have more than $1,000 but less than one year’s savings, 15 per cent have saved enough for one-to-five years, and only 18 per cent have more than five years worth of savings. Among single persons over 65 without pension income, the median income is under $20,000; less than $1700.00 per month.
The report also found the old-age security and guaranteed income supplement guarantee levels are falling behind, and trends in income sources for seniors suggest that high poverty rates among seniors will further increase. “This new data on retirement savings and gaps in support makes one thing perfectly clear: we have a retirement income crisis on our hands that requires urgent government action now,” said Rick Smith, Executive Director of the Broadbent Institute.
It’s important for everyone to financially prepare for retirement but women have several unique circumstances which they need to consider:
Longer life expectancy; 80% of men die married and 80% of women die single. Women are more likely than men to have to live on one reduced retirement income after their partner dies. If a woman’s partner has a private pension and dies before them, the pension usually only continues to pay the beneficiary between 50% to 75% of the pension benefit their partner was receiving.
Women are often employed in lower paying jobs then men; are more likely to take time away from work to give birth and care for children; and are more likely to work part time while raising children which results in lower Canada Pension Plan Benefit Payments and private pension benefits.
Women tend to be over represented in occupations without employer pension plans.
When it comes to investing your money, it’s best to meet with a qualified Investment Specialist who can review your personal circumstances and help you develop the right retirement plan for you!
1. Should I put my money in a Registered Retirement Savings Plan (RRSP) or a Tax Free Savings Account (TFSA)?
When you are trying to decide whether to invest in a RRSP or TFSA you need to look at your retirement picture. An RRSP gives you a tax break now but when you access the money in an RRSP, you will have to pay the tax on it. So, if you are making substantially more money now and have a higher income now (in your “working years”) than you will have when you retire, a RRSP may be the best choice as you benefit from lowering your tax contribution now and deferring paying tax until you are in a lower tax bracket at retirement. If your income level will be approximately the same when you retire, then a TFSA may be the best choice. A TFSA does not give you a tax break but you do not have to pay taxes on any of the money you make while the TFSA is invested. Some people, buy a RRSP every year or monthly to offset their taxes and then put the money they get back from the government when they do their income tax into an TFSA.
2. I’m afraid to invest my money in Mutual Funds in case I lose it.
With Mutual Funds there is always a risk to “lose” money, but remember that the loss is only realized when you sell the units of the mutual fund. Mutual funds are meant as a long term investment to ensure you have the time horizon to overcome market corrections. Mutual funds can range from very conservative to very aggressive depending on your risk profile. One way to reduce your risk is to diversify across all markets; CASH/FIXED INCOME/EQUITIES which help to “buffer” the event of one market going through a correction.
3. Savings accounts don’t pay much interest. What other savings options are worth considering?
Almost all secure short term investments like savings accounts don’t pay much interest. If you want your investment to be 100% secure, you can look at purchasing a guaranteed investment certificate (GIC) either a locked in GIC (which tends to pay a higher interest rate) or a cashable GIC offering an interest rate better than a bank account but not as high as a locked in GIC, and depending on your risk profile you can invest in mutual funds as well.
4. In these uncertain economic times, how can I best balance living for today with planning for the future?
Balance is always an important consideration. Starting to save for your future doesn’t have to be a financial burden. Smaller manageable amounts saved at regular intervals can help build up your investment portfolio.
5. I have a young family and lots of expenses. I don’t have much extra money. Is there any point in trying to save money for the future right now?
Young families still need to save, especially for emergencies. It’s important to understand what your values, goals and objectives are. Whether it be saving for child’ post secondary education in a RESP or saving in a TFSA/RRSP or non registered investment, it’s very important to start even with a very small amount. As a complimentary option to your savings, set up a small line of credit in case of emergencies as well.
6. How much money do I need to save for my retirement?
The amount of money required in retirement depends on what you want to do in retirement, the lifestyle you wish to have and when you want to retire. Lets’ say you wish to retire at 65; you should have 25 years of income saved in theory (to age 90). This means if you want to maintain a lifestyle that is supported by $45K a year X 25 years = $1,125,000.00. Now keep in mind, with government benefits like CPP and OAS, you may only require $25K annual income, resulting in $625,000 to be saved. Some of this money could be saved in the form of a house or other property. This is why it is so important to start early and invest regularly, that way you have time and compounding on your side.
Start the Money Smart Challenge Today by Answering this Question:
Money Smart Week 15 Question: What is the next step you plan to take to financially prepare for your retirement?
Now, What do I do?
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