Are you planning for retirement? If you’re like many Canadians, you’re probably thinking about it...but you might not be getting much farther than that. After all, that’s something you’ll get to – eventually – right?
Maybe not. A new poll by TD Canada Trust found that 30 percent of Canadians don’t think they’ll get around to saving for retirement until it’s too late – if they get to it at all. According to the poll of 1,251 Canadians, 15 percent said they’d wait until five years before they retire to start saving, while another 9 percent say they’ll start even later. Six percent figure they probably won’t even bother!
Big mistake – and you don’t have to take our word for it. TD polled today’s retirees about what they’d do differently.
Here’s what they said…
Tips from today’s retirees
1) Save more
Of the 929 retired Canadians polled, 52 percent said they recommend making a budget, sticking to it and saving more. Okay, okay. This is just like eating your vegetables – or getting your kids to eat them: You know you should do it, but somehow it just doesn’t always work out that way. But this is one instance where we should probably all listen to our parents and grandparents. They aren’t just telling us what’s good for us; this time, they actually walked the walk.
In the 1990s, personal savings rates dropped from their comfortable perch in the low teens to below 10 percent. By 1997, they had dropped below five percent. Today, Canadians save about 3.5 percent of their income, on average. What that suggests is that while current retirees may have saved more than 10 percent of their income for decades, those looking to retire in the future are likely to have a lot less in the bank - if they have anything at all. Plus, what many of us think of as an old-timey, Recession-born tradition of tucking money away is actually what allowed today’s retirees to leave their jobs in their 50s and 60s. Will your savings allow you to ditch your nine-to-five that soon?
Maybe you love your job, but according to Cynthia Caskey, a portfolio and sales manager for TD Waterhouse Private Investment Advice, “The question is why are you working longer than age 65? There’s no mandatory retirement age...but are you working because you want to, or because your financial choices force you to?”
2) Contribute the maximum amount to your RRSP
Forty-four percent of retirees would urge working Canadians to max out their RRSPs. For 2012, that maximum is 18 percent of earned income, up to $22, 970. Okay, that kind of money isn’t easy to come up with, even for diligent savers. Where many people go wrong is assuming that if they can’t contribute much, they shouldn’t bother.
“I think [the maximum contribution] is a stretch for most people. You have to deliberately plan around that, because it’s not the kind of money people have lying around,” Caskey said. “What I would suggest is that people pay themselves first by making regular, monthly contributions to their RRSP. Just having that small increment every single month is one of the key ways to get closer to your max.”
Chances are you have a smart phone or cable bill that approaches $100 per month. If you start devoting that much to your RRSP each month, you can save more than $200,000 over 30 years (assuming a 6 percent rate of return). That may be a long way from the maximum yearly contribution, but if you combine it with a few other smart financial choices - such as paying down your mortgage and steering clear of debt - you’ll have a lot more options when it comes time to retire.
3) Pay off your debts
Personal finance is a bit of a balancing act; debt sits on one side of the scale and your assets, or savings, weigh down the other. That means if you’ve saved $200,000 for retirement (yes!) but still have $200,00 of debt (no!), in financial terms, you’re (hate to say it) penniless.
This explains why 43 percent of current retirees felt that retiring without debt is important. And, much like with personal savings, retirees have most other Canadians beat here too. In 2012, Canadians’ ratio of debt to annual disposable income hit record highs – more than once, actually. In fact, the aggregate debt-to-income ratio of Canadian households has trended upward over the past 30 years, according to figures from the Bank of Canada.
So how can you balance paying off debt with saving for retirement? Caskey suggests tax-efficient investing as a possible solution.
“If you contribute to an RRSP, this means an upfront income tax deduction,” Caskey said. “If you take that money to pay down your debts, you’re saving for yourself, but using dollars from Ottawa. So you can have a bit of your cake and eat it too, as long as you have some good planning.”
Caskey recommends paying down the highest interest debts first – and consulting an advisor for more help on debt repayment and tax-efficient investing strategies.
4) Where do you want to go?
We often think of retirement as an age where we’ll be able to pursue more things we enjoy, rather than trudging off to work every morning. It’s a nice sentiment, but statistics suggest that many people may not have much say in how they live out their golden years – and may even spend them trudging off to work.
“What we’re hearing is that fewer Canadians are going to be covered by pension plans going forward, which means that more people are going to be relying on their own savings and government programs,” Caskey said.
The problem is, retiring on government funds is far from cushy, and for those retiring in the relatively distant future, those funds are hardly guaranteed.
“I think counting on government programs means giving up control over what your life will look like in the future,” Caskey said.
No savings, no choices
So go ahead. Skip saving for retirement. It’s really your choice. The irony is that when the time finally comes to stop working, you may be faced with very few choices in terms of how you live out the rest of your life – and it might mean heading right on back to work…
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