Retirement can mean different things to different people. For employees, it can mean freedom from the 9 to 5 grind, or the loss of their regular paycheck. For people who have saved for retirement, it can be an event to be celebrated and be free to do whatever they want: travel, learn new hobbies, and/or spend time with grandchildren. But for those who have not, retirement can be a period that is dreadful, stressful, and scary.
People engaged and successful in business can retire early and still be fully or partially involved in their businesses. Being financially prepared for this moment should be a goal and focus of your financial planning.
Reasons to save for retirement
The main reason to save for retirement is to be financially prepared when you lose your regular paycheck and continue living your life in the quality that you are used to. Aside from allowing yourself to continually live the kind of life you have been accustomed to, here are some more reasons why saving for retirement is important:
- Do not be a burden to your children – living our lives in a sandwich generation where we need to take care of our children and also provide for our aging parents has presented a financial hurdle that can sometimes be too heavy a burden. We would not want our children to feel the same way and experience the same hardships of providing for us as well as for their new family. We want to be financially ready to support our later years and want our children to enjoy their new family.
- A company-sponsored pension plan is a thing of the past – most employers no longer offer company-funded pension plans. A lot of them now require you to fund your own retirement first, and they will just match up your contribution. If you don’t open a company-funded retirement savings plan, your employer is not obliged to start one for you. There are also some employers who do not have any kind of retirement planning for their employees at all.
- Your registered retirement savings account is tax-deferred – this will reduce the taxes you pay now. Although you will be taxed when you withdraw, it will be at a much lower tax rate due to lower income when you retire than you are being taxed right now. Your tax savings outweigh the tax to be paid upon withdrawal.
- Reap the benefits of compounding interest – since your savings will grow based on the interest rate of your account, this growth will grow every year due to compounding interest; this is basically interest on your investment as well as on interest already earned.
- You can’t rely on government pension plans only – in order to receive the maximum pension plan, you should have contributed the maximum contribution. For 2020, the maximum pension payout for new beneficiaries in Canada is $1,175.83, while the average payout is only $672.87 (source: Canada.ca)
- Longer life span – with the advancement in healthcare, people are now living longer than they used to. What if you lived too long? We read news about people reaching the age of 100. Assuming you retire at the age of 65, that is 35 years of living off your government pension and your retirement savings.
How to Save for Retirement?
Saving for retirement may not be at the top of your priority, especially if you are still young or living paycheck to paycheck. However, you can still start on your retirement plan by doing the following:
- start early, even for just $25 a week – what can you give up to save $25/week? Can you prepare your morning coffee instead of passing by your favorite coffee shop every morning? Can you pack your lunch? Minimize eating out? Quit or minimize smoking? Drinking? Mani/Pedi? Look into your expenses and you will be surprised to see $25 somewhere. Cut back a little on your expenses and put that money into your retirement account. Your $25 weekly savings, when you start at age 25, can turn into $120,872 by age 65 at 6% interest.
- avail of company-sponsored retirement savings plan – a lot of companies offer their employees a retirement plan. An employee will put in a certain percentage of his pay towards the plan, usually between 2% to 6% depending on your length of stay with the company and your position. Your employer will then match your contribution 100%. Although the company share is taxable, you are still ahead in the savings game. Your contribution lowers your taxable income. While your company’s distribution is taxable, this is still net gain on your investment. The same value is added to your taxable income is also taken out under your registered retirement savings plan contribution.
When should I start saving for retirement?
The answer here is NOW. If you have not started saving yet, then do not delay. They say better late than never, right? However, the longer you wait, the more you need to save in order to make up for the lost opportunity offered by compounding interest.
How much do I need?
Your savings goal will really depend on where you retire, what compromises on your lifestyle are you willing to take, and what will be your forecast monthly expenses. Is your mortgage paid up? Do you still have car loans, student loans, lines of credits outstanding? Are you selling your house and downsize to a rental or get a condo? All of these need to be considered.
There are a lot of retirement calculators available online. However, the figures they show can be daunting especially if you are nowhere near what you should have already saved at your current age. But don’t despair. At least now, you are equipped with knowledge and understanding regarding the importance of saving for retirement.
Retirement can be an event in your life that you will look forward to. It can mean freedom from waking up so early, being on the road all the time traveling to and from work, not being able to spend quality time with your family, and not being able to do what you really want to do. Regardless of your age, start planning now.