How To Create Your Retirement Plan
Saving a percentage of your income in your employer-sponsored retirement accountat least enough to get the full company matchis a good start.
But without a more specific, long-term plan, you wont know if your money will last as long as you need it toor if youll be able to do all the things that matter to you, and still have the retirement you want. Thats where a personal retirement plan comes in.A good plan gives you a roadmap to the retirement you want, based on:
- When you want to retire
- How long you expect to be retire
- Your future expenses for needs, wants and wishes
- Your savings and income
It also takes into account your investment portfolio and risk toleranceTooltip How an investor feels about risk. Your risk tolerance helps you decide whether to invest more conservatively or more aggressively. and other needs and goals, like gift-giving, legacy planning and major life events.
Registered Retirement Savings Plan
The Registered Retirement Savings Plan is a tax-sheltered savings account that houses certain investments. Basically, as long as youre earning income and youre under age 69, you can open an RRSP.
The tax benefits on RRSPs are remarkable. For one, any contributions you make into an RRSP grow tax-free. So, if the investments inside your RRSP perform well, you wont have to pay taxes on your earnings. Additionally, any RRSP contributions are automatically deducted from your taxable income, which can help you reduce how much you pay in taxes every year.
RRSPs do have some restrictions, however. For one, your annual contributions cannot exceed 18% of your previous years income, up to a maximum of $27,830. Any unused contribution space, however, will be rolled over to the next year.
Finally, you will pay taxes on RRSP withdrawals in retirement. Thats because your RRSP contributions are pre-tax, meaning money the CRA hasnt collected taxes on. When you start making withdrawals in retirement, the CRA will tax them as ordinary income.
Am I Eligible For Old Age Security
Eligibility for Old Age Security depends on how much income you earn. The default value in the calculator is the 2019 maximum monthly payment regardless of your marital status. You can check the latest Old Age Security payment amounts to find out exactly how much money you’ll receive – and add it to the calculator for more accuracy.
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Individual Stocks And Bonds
Some investors prefer researching and purchasing shares of individual stocks and bonds. It can take significant investment and know-how to build a diversified portfolio of individual securities, but a case can be made for including individual stocks and bonds as part of your investment strategy. For example, producing a steady stream of income can be compelling as you begin to withdraw money from your investments in retirement. Dividend stocks can provide a regular income stream, and constructing a bond ladder helps to manage interest rate risk while generating steady cash flow.
Mutual Funds For Retirees
As for how to invest the rest of your nest egg, many experts believe that retirees can devote more of their savings to stocks than they think. Thats partly because both the bucket and cover-the-basics approaches protect retirees from short-term stock market downturns. And when you have time to wait out declines, you can tolerate more stock market volatility.
The right mix depends on your age, says Catherine Gordon, a strategist at Vanguard Group. At age 66, Gordon says, you can safely invest half of your assets in stocks and the rest in bonds and cash. The stock portion of the portfolio should be divided between domestic and foreign stocks. The bond allocation should include foreign and U.S. debt and be spread among different maturities, though it shouldnt go overboard on long-term bonds.
A look at Vanguards target-date retirement fundsall-in-one funds that become more conservative as you approach the target dategives you a good idea of the fund giants ideal allocations. Vanguard Target Retirement 2015 , which is designed for an investor on the cusp of retirement, had 51% of its portfolio in stocks and 45% in bonds at last report.
Vanguard Target Retirement 2010 , which is for investors who are five years into retirement, has 37% of its assets in stocks and the rest in bonds and cash. Vanguard Target Retirement Income Fund , which is aimed at clients who are 72 or older, has just 30% in stocks and the rest in bonds and cash.
Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our reporters and editors focus on the points consumers care about most how to save for retirement, understanding the types of accounts, how to choose investments and more so you can feel confident when planning for your future.
Understanding Your Investment Account Options
Now that youve made the right choice in deciding to save for retirement, make sure you are investing that money wisely.
The lineup of retirement accounts is a giant bowl of alphabet soup: 401s, 403s, 457s, I.R.A.s, Roth I.R.A.s, Solo 401s and all the rest. They came into existence over the decades for specific reasons, designed to help people who couldnt get all the benefits of the other accounts. But the result is a system that leaves many confused.
The first thing you need to know is that your account options will depend in large part on where and how you work.
The Boring Glory Of Index Funds
Your best bet is to buy something called an index fund and keep it forever. Index funds buy every stock or bond in a particular category or market. The advantage is that you know youll be capturing all of the returns available in, say, big American stocks or bonds in emerging markets.
And yes, buying index funds is boring: You usually wont see enormous day-to-day swings in prices the same way you may if you owned Apple stock. But those big swings come with powerful feelings of greed, fear and regret, and those feelings may cause you to buy or sell your investments at the worst possible time. So best to avoid the emotional tumult by touching your investments
Will I Rent Still Have A Mortgage Or Own My Home Outright In Retirement
If you rent, youll need more savings to cover the cost but on the other hand, you wont have money tied up in a home. If you end up retiring with a mortgage, there will be that to plan for as well.
Owning the place you live indebt-free reduces the risk of rent increases or being asked to find a new place to live. You’ll have more control over your finances, but you will have to take care of maintenance, insurance and rates.
Being mortgage-free by retirement is a great goal to aim for. The reason many people currently in retirement are able to manage financially is because they no longer have the burden of mortgage repayments.
Selecting A Brokerage Firm
An increasing number of large, national, well-known brokerage and mutual fund firms are willing to open small accounts without fees or minimums. Opening accounts with these larger firms can be a good idea. They often have a wide selection of investment options and the most transparent and reasonable fees.
Also, these large firms have the infrastructure to offer you additional services as your needs change over time.
It is important to take the time to make a good selection. Most, if not all, firms charge fees for transferring accounts, and switching firms repeatedly will reduce your savings. Focus on fees and the range of ETFs and mutual funds that they offer. Dont be too concerned with the trading tools and services they provide, because trading is not wise when you are saving and have limited funds.
How Should I Invest
After establishing how much to save, its time to figure out what to invest in. There’s a lot to consider when building a retirement portfolio, and we’ll take you through some of those details below. But here are some of the most common products investors choose for retirement.
If youre saving for retirement in your companys 401 or a similar employer plan, its worth noting that not all of these investments may be available. But you can gain access to the other types of investments you desire by using different retirement accounts more on those near the bottom of this page.
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Risk Of Running Out Of Income
The longer you live and the more you take out of your pot, the harder it will be to make your pension pot last as long as you need it to. To try to avoid this happening, you need to manage your pension pot carefully. This includes thinking about how much to take out and how often, and how to invest your pension pot.
Essential Tips For Retirement Saving
Regardless of whether you’re 25 or 55, saving for retirement is a wise financial strategy. Everyone will face retirement at some point, either by choice or necessity. Whether you are on track for retirement savings or need to play catch up, or you’re a financial advisor who wants to give clients a leg up on preparing for their later years, these eight essential tips for retirement savings will put more money in your account.
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Group Registered Retirement Savings Plan
A Group Registered Retirement Savings Plan is similar to a RRSP, except its sponsored by your employer. Often, your employer will match your contributions , and contributions are taken directly from your paycheck.
If your employer offers a match, always take the match! You dont want to leave money sitting on the table.
Investing During Retirement: How To Make Your Money Last
Congratulations: it’s finally here. Retirement is a major accomplishment for most people. It often means you’ve set aside enough money to stop working and live comfortably without having to rely on a regular paycheque.
Of course, retirement means different things to different people. For some, it’s about never working again, and instead spending your days doing things you enjoy most, such as travelling, pursuing hobbies and spending more time with family and friends. For others, retirement means working part time or occasionally to stay busy and engaged in a profession, but without the need to earn a regular income.
Regardless of what retirement looks like to you, the key is to enjoy this time of your life, while making sure you don’t outlive your retirement savings. For most retirees, that means developing an investing strategy that will allow you to withdraw money from your portfolio, while still enabling it to grow over the longer term.
Below are some strategies for investing during retirement:
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Invest Your Money In Tax
Another extremely important part of investing for the future is understanding the tax implications of the different investment vehicles. A traditional 401 account and a traditional IRA, for example, let you invest pre-tax money now and only pay taxes on the money you withdraw in retirement. With a Roth 401 or Roth IRA, though, you invest money that you’ve already been taxed on so you won’t get hit with a tax bill when you make withdrawals later.
Paying taxes now so you can set yourself up to not owe taxes later can be useful if you expect to be in a higher tax bracket in retirement . And, saving on taxes in retirement can leave you with more cash to spend.
You can open an IRA or Roth IRA with a traditional brokerage like Fidelity and choose the investments yourself. Or you can sign up for a robo-advisor, like Wealthfront and Betterment, which helps you determine which investments make sense for you based on your risk tolerance, goals and retirement date. Plus, a robo-advisor will automatically rebalance your portfolio over time.
Where To Go For More Information
Your Account Statement. You can keep track of how your investments are performing by checking your account statements. Your employer is required to provide them at least four times a year, typically at the end of March, June, September and December. Many plan providers, however, send you statements on a monthly basis. You may also be able to access your account information online.
Your Employer and Plan Administrator. Your employer or plan administrator may offer resources to help you with your investment decision making and retirement planning. Many employers provide educational material and seminars about retirement planning and saving. In addition, they may offer financial advice on your plan through a third party advisory service like a managed account.
Online Resources. There are many websites sites that specialize in 401 information and advice, including the plan provider your employer has chosen. Your plan providers website is often the best resource to find historical performance information related to your investments and descriptions of your investment options. Many providers offer resources to help with asset allocation and other decisions, not to mention practical information on saving and investing.
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How Much Do I Need To Retire
How much you need in retirement will depend on how your income and expenses change when you retire. As a general rule, you’ll want to aim for at least 70-80% of your pre-retirement income for each year of your retirement. In retirement you may spend less money on savings, housing, tax, and transportation to work, but more on hobbies, utilities, and healthcare. Ask yourself when I retire will I need same amount of money I’m earning now or less? You could use a tool to figure out your ideal replacement ratio.
Buy Bonds For The Yield
A bond is a loan to the government, a corporation, or a municipality. The borrower agrees to pay you interest for a set amount of time and return the amount you loaned them . The interest income you receive from a bond or bond fund can be a steady source of retirement income if you plan their maturities right.
Standard & Poor’s Global Ratings, Moody’s, and Fitch Ratings are companies that rate bonds. Bonds are given quality ratings, which give you an idea of the issuer’s ability to pay the yields and give back your principal.
There are short-term, mid-term, and long-term bonds. Bonds have different rates some have adjustable interest rates , and others have fixed rates.
High-yield bonds pay higher coupon rates but have lower quality ratings. Low-yield have higher quality ratings because they tend to have lower risks. Each can be used differently in a retirement plan.
For retirement, individual bonds can be used to form a bond ladder. This strategy uses the maturity dates of bonds to match your financial needs at any given time. This investment structure is often referred to as asset-liability matching or time-segmentation.
In this strategy, the intent is to hold the bonds until maturity. If you plan to retire in May of 2040, for example, and need your first payment, you will begin by purchasing a $1,000 bond that matures in May 2040. Next, you’d buy one that matures in June, then August, and so on.
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Use The 4% Rule To Estimate How Much Money You Can Comfortably Withdraw Each Year
You used the 4% rule to estimate a target retirement number, but you can also use it to plan how much money you should withdraw each year once you retire.
“The 4% rule was devised to figure out the largest percentage of your investments you can take out in the first year of retirement and still be highly confident that you won’t run out of money,” Young explained. “The rule assumes that you withdraw 4% of your investments the first year. Then every year afterward, you adjust your withdrawal to reflect the inflation rate. This way, you can continue the same standard of living throughout retirement.”
Keep in mind that the 4% rule is a general estimate and depending on your circumstances and expenses, you may need to withdraw more or less. For a personalized withdrawal strategy, you should seek help from a Certified Financial Planner.
What Income Do You Expect To Have
Fortunately, when it comes to saving for retirement, youre not alone. The Canadian government offers several pension plans to retirees, and depending on how long you worked and your income needs, you could greatly enhance your savings. Here are some post-retirement income streams you can add to your retirement planning.
Canada Pension Plan
The Canada Pension Plan is a government-sponsored pension that distributes monthly payments to retirees who contributed to their CCP during their working years. CCP distributions depend entirely on how much you contributed to the system while you were working. You can start taking distributions as early as age 60 or as late as 70, though the earlier you start receiving payouts, the lower your monthly payments will be.
Old Age Security
Like the CCP, Old Age Security is a government-sponsored pension. Unlike the CCP, however, OAS doesnt depend on your contributions. Basically, any Canadian citizen above age 65or legal residents who have lived in Canada for at least ten yearsis eligible for OAS payouts. Similar to CCP, you can choose to defer your OAS payouts to an age above 65, which will raise your monthly payments the longer you wait.
Guaranteed Income Supplement
Canadians with low incomes may be eligible for Guaranteed Income Supplement . In order to receive GIS payments, your income has to be lower than a certain threshold , and you have to file your income tax returns every year, even if you dont expect to owe taxes.
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