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Why Should You Save for Retirement

Why Should You Save for Retirement

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.

Conclusion

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.

24 Comments

Stephen Posted on7:54 am - January 5, 2020

I agree with your lesson here been a later starter in saving money for my elderly days. I’m 48 so looking forward to at least saving a few pounds for my retirement days and love the information you have on this website. Thanks for the advice I’m looking into some of your advice and will save this website for future decisions.

    Leslie Posted on5:31 pm - January 5, 2020

    I am glad that you have decided to start saving for your retirement, Stephen. I myself started in my early 40s and will keep on building on that nest egg.

Megan Posted on12:52 am - January 6, 2020

Thanks for this article Leslie! I am also very passionate about financial literacy and I am glad there are others out there helping to spread the word as this is very important for quite literally everyone! Very well written article and I am planning on taking saving more for retirement now!

    Leslie Posted on2:25 am - January 6, 2020

    Thanks for your kind words, Megan. The more people spreading financial literacy, the better we will all be.

John Posted on1:24 am - January 6, 2020

Thank you for this important information. Saving for retirement is something I need to start taking more serious than I have been. Your points are all excellent advice.

Thanks for sharing.

    Leslie Posted on2:25 am - January 6, 2020

    I am glad I was able to relay important points that spoke to you, John. Best of luck with your financial planning.

FinancialMarketsEducation.com Posted on11:04 pm - January 7, 2020

It is amazing how much $25 per week will make towards a retirement goal. Most people won’t even miss it, either. The sensation feeds on itself. In other words, after a couple of years when people see how much their money has grown, it makes them want to increase the amount. Nice article, and thanks for posting.

    Elle Posted on3:04 am - January 11, 2020

    It sure is, Jim. And that is how I started. I realized that I did not really miss the $25, and wanted to see more in my savings. I always readjust my budget to make room for more savings.

Venya Posted on7:52 am - January 8, 2020

Dear Leslie,
I am also someone who is planning to take early retirement instead of waiting till I grow up till the legal retirement age in my country (60 years).
I am always trying to learn lessons from people who are either working towards the same goal or have already reached there.
Your post gave me a good perspective of how things are in Canada and I can say the regulations are pretty much the same in India as well.
I agree with you wholeheartedly about the point of not being dependent on government pension plans only.
There are more avenues available today to help us save to build wealth and which are tax efficient as well.
I look out for your next post on the same subject 🙂

    Elle Posted on3:02 am - January 11, 2020

    Hi Venya, thank you so much for your feedback. I am glad that my post reached India. There are indeed a lot of avenues that will allow us to get ready for retirement. I am hoping to get there before I reach 60.

EcoCatherine Posted on1:02 am - January 26, 2020

This is something I have been putting off for far too long now. I will get on this right away. Do you know which banking branches offer the best rates?

    Leslie Posted on5:43 am - January 26, 2020

    I would suggest talking to your financial advisor. They can gauge your risk tolerance before offering you advice on where and how to invest for your retirement. There are a lot of investment options out there, and you should consider not only the interest rate but also the guarantees for your protection.

Janicke Posted on4:16 pm - January 31, 2020

I am 44 years old and have to start saving. I didn’t know all this. I have to make my own coffee from now and quit eating out. I think I can save a lot just to do that. Thank you for this article.

    Leslie Posted on2:56 pm - February 1, 2020

    You are welcome, Janicke. When I first become a financial advisor, that’s the very first thing I learned: how to cut down on unnecessary expenses that I thought was a necessity. Best of luck to you and I hope you can talk to a financial planner to help you plan for your retirement.

Sylvia Guillemette Posted on5:59 pm - January 31, 2020

I have a 401K plan through work. They match at 3% and are fully vested after I think it’s 5 or 10 years… I have to go back and look it up to be sure.

I learned a lot in here even though some of it doesn’t make sense to me. I do have a friend who’s a financial planner, so she said she’ll help me to learn to save for retirement.

Thanks for a great read!

    Leslie Posted on2:54 pm - February 1, 2020

    The good news is that you have taken advantage of the 401K through your work and they match your investment. It is always best to contact your financial advisor because of the uniqueness of each situation. Your financial advisor can take a look at the whole picture and make recommendations that will best suit your goals, risk tolerance, timeline, etc. I applaud your action of approaching your financial advisor to help you look into your retirement planning.

Michele Posted on3:02 am - February 3, 2020

You are right..it does depend on location. I’m from an area where cost of living is lower than average so it’s better to live below your means to retire..especially retire early. Very informative. So many options you have. I see Canada has some similarities but U.S. has raised its retirement age from 62 to 65 for the next generation and 70 for some others. I don’t plan to work for someone else forever. Thank God for WA opportunities.

Compounding interest is one of the best ideas for saving for retirement. Although 401k is big among our jobs, ROTH IRA could be a good option depending on the individual’s goals. Thanks for sharing all those options.

    Leslie Posted on2:47 pm - February 3, 2020

    Thanks for your comment. Indeed, there are plenty of investment vehicles that we can use to save for our retirement. The important thing is to start saving, then save more.

JoAnne Adrian Posted on12:28 am - February 4, 2020

Hi Leslie

This has made me stop and think! Quite honestly, I am not prepared, but I need to start, so time to set a plan in place before I hit the retirement stage.

Being in NZ we do get NZ Super at 65, but as I am a long way off, ther is not saying it will still be around when I get there.

Times are changing and we need to be in charge of our own destinys and not rely upons others or family to be a burdon upon.

Great read.
Cheers
Jo

    Leslie Posted on2:46 pm - February 4, 2020

    Indeed, Jo. Times change and our government can make drastic changes to our retirement program, regardless of which country you reside. It is best to be prepared on our own, and not just rely on whatever we get from the government.

Kyle Posted on11:02 pm - February 8, 2020

I plan to teach this info to my children. I’ve been saving through investing for many years and finally feel that I’m on the path to retirement. Your article was well written and I’ll be passing this on to a few friends who could benefit from it.

    Leslie Posted on11:12 pm - February 8, 2020

    Thanks, Kyle. As parents, we need to educate our children on how to prepare for the rainy days.

Janet Posted on9:42 am - February 9, 2020

Hi Leslie. Thank you for your sharing. Retirement shouldn’t be a fear or goal. We don’t need to wait until retire to enjoy and have the freedom of life we want to have. Life basically is a learning journey. We should live and enjoy life at every present every moment along the learning journey.

Saving for retirement shouldn’t become a stress but a lesson to learn how to manage our cash flow and finance. Just to share my thought here…:-)

    Leslie Posted on4:30 pm - February 9, 2020

    I agree, Janet. We all need to find the balance between enjoying life now and saving for our retirement. I just need to emphasize the savings part because I have met a lot of clients who fear to retire due to the fact that they did not prepare for it. I feel that someone along their journey should have advised them on how to prepare for this. When we are prepared, retirement is not a phase of our life to fear but to look forward to. With proper preparation and balance, we can aim to retire early or whenever we want to. It becomes our decision, not just because of our age.

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