No matter what age you are, if you’re earning an income, it’s best to start preparing now if you want to retire comfortably someday. Since most of us start working at a relatively young age, we don’t always consider the idea of retiring until much later on. As tempting as it can be to coast through life, spending money haphazardly until you discover your career path, it’s very important to start saving for your retirement as soon as you can.
If you’re trying to get a jump start and prepare for your retirement early, you’ve made a wise decision. However, do you know how to get started? If not, don’t be embarrassed, because plenty of Canadians are in the exact same position as you.
For the majority of Canadians, when it comes to retirement, they’re in one of two boats: the boat that’s prepared and excited for retirement or the boat that shudders at the mere mention of the word. Most of us don’t want to work forever, so why aren’t we doing everything in our power to prepare? There are, of course, several answers to this question. Low income and even fear are at the top of the list. But when it comes down to it, the real answer is that most of us just don’t have a plan.
In order to retire with enough time left to actually enjoy your retirement, you need a plan. Everyone’s plan will be different, that’s a given, but as a rule of thumb you need to, at the very least, have the following:
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Deciding how you want to live in the future is a daunting task. But if you want to retire by the time you’re 65 or even better, before then, it’s best to start preparing your finances now. If you’re having trouble getting started, just ask yourself the following questions:
Money, it’s the number one thing you need to retire. It’s also the number one reason why people have so much trouble saving for their retirement in the first place. Your retirement needs to be funded. Then again, so do all the years in between now and the day you retire. This is where your plan is going to become very helpful. In order to save, you need to plan. How much you need to save depends largely on the other forms of retirement benefits you will or won’t be receiving.
If you’re a Canadian citizen and you’ve been living/working in Canada for the majority of your life, then you’re more than likely eligible to receive both CPP and OAS. Old Age Security (OAS) is a government benefit funded by the income tax that the Canadian Government collects every year.
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The Canadian Pension Plan (CPP), on the other hand, is not a government benefit. Actually, it can be considered a defined benefit pension plan. You, as a Canadian worker, and your employer pay into the CPP through your paychecks. Once you retire, you’ll be eligible to receive CPP because you spent your whole working life paying into it.
Can you use your CPP to get a loan? Find out here.
Read this if you want to know about getting loans while benefiting from OAS.
While the majority of Canadians will receive CPP and OAS when they retire, some will also receive benefits from an employer-sponsored pension plan. For those lucky enough to have an employer-sponsored pension plan, it will more than likely make up the bulk of their retirement income. Those who do not have an employer-sponsored pension plan will have to focus more heavily on their personal retirement savings.
Need more information about tax-free savings accounts? Check this out.
There are two types of employer-sponsored pension plans, known as “defined benefit” and “defined contribution”.
With this type of plan, your employer is promising to pay you a certain (defined) amount of money each year after you retire. The amount you receive is typically based on your income and the number of years you worked.
With this type of plan, you and your employer contribute a certain (defined) amount of money to your pension each year. The amount of money you’ll receive once you retire is not set; it depends on the amount contributed and how much the investments make.
On top of the government and employer-sponsored benefits, you may receive, you’ll likely need your own personal retirement savings. This is where an RRSP can help. A registered retirement savings plan is a tax-deferred way to save for your retirement.
Did you accidentally over-contribute to your RRSP? Here’s what to do.
Any money that you deposit into your RRSP account can’t be taxed, which means that when you deposit your after-tax income into it, the government will reimburse you the tax you paid on that money. Your RRSP then grows because of the investments you made, so any money you earn from this is also tax-free. Once you retire and withdraw money from your RRSP, you will be taxed based on the tax bracket you are now in.
Did you know you can also use your RRSP to buy a home? Click here to learn how.
While planning for your retirement you need to consider all the expenses you’ll have, being honest with yourself and your spouse will definitely help you in the long run as you’ll be less likely to come across an expense you weren’t prepared for. Here are a few of the most important expenses you’ll need to plan and budget for:
As we said, if you want to retire by 65 or earlier, it’s best to start planning and saving as soon as you possibly can. You don’t need to go off investing all your money right away either. You can simply set up an automatic savings and payments system through your bank, wherein a small amount (which you can adjust) of every paycheck will be automatically deposited into your savings and/or RRSP accounts. This way, you’ll be saving money without even noticing it. With every dollar you invest, you’ll be that much closer to retiring in comfort.
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Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.
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