How To Start A Retirement Plan In Canada
Here Are Some Things You Should Factor Into Your Calculations:
Housing costs, including rent or a mortgage, heating, water and maintenance
Health-care costs
Day-to-day living, such as food, clothing, transportation
Entertainment, including restaurants, movies, plays
Travel, including flights, hotels, gas if driving
Possible life insurance
What’s the magic number to hit for a golden retirement?
Over the years, finance experts have said that people need to save $1 million that’s recently climbed to $2 million as the cost of living and age demographics have changed. Some advise that you need to save 80% to 90% of your annual pre-retirement income, or that you need to save 12 times your pre-retirement salary. Those numbers and formulas can be a guide, but they’re not gospel everyone’s situation will be different.
The Federal Thrift Savings Plan
The Thrift Savings Plan is a lot like a 401 plan on steroids, and its available to government workers and members of the uniformed services.
Participants choose from five low-cost investment options, including a bond fund, an S& P 500 index fund, a small-cap fund and an international stock fund plus a fund that invests in specially issued Treasury securities.
On top of that, federal workers can choose from among several lifecycle funds with different target retirement dates that invest in those core funds, making investment decisions relatively easy.
Pros: Federal employees can get a 5 percent employer contribution to the TSP, which includes a 1 percent non-elective contribution, a dollar-for-dollar match for the next 3 percent and a 50 percent match for the next 2 percent contributed.
The formula is a bit complicated, but if you put in 5 percent, they put in 5 percent, says Littell. Another positive is that the investment fees are shockingly low four hundredths of a percentage point. That translates to 40 cents annually per $1,000 invested much lower than youll find elsewhere.
Cons: As with all defined contribution plans, theres always uncertainty about what your account balance might be when you retire.
What it means to you: You still need to decide how much to contribute, how to invest, and whether to make the Roth election. However, it makes a lot of sense to contribute at least 5 percent of your salary to get the maximum employer contribution.
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Retirement Fund Theory Vs Reality
Regardless of your current age or income, the recipe for a successful retirement fund has a simple formula: Set a goal, commit to it, and repeat. One common approach encourages would-be investors to participate in their employer-sponsored retirement savings plan. Another suggests entering personal information into a retirement planning calculator in order to project how much money will be needed in order to fund retirement.
While both ideas are great in theory, reality can come crashing down quickly. Consider, for example, that about 32% of all private-sector workers in the U.S. dont have access to retirement benefits, according to 2021 figures from the U.S. Bureau of Labor Statistics. That, of course, leaves 68% who do, but only 75% of workers with access to a plan choose to participate in it, and only 51% of all American workers in the private industry are saving in one.
Also, the enormous dollar amounts that most people see when they use a retirement planning calculator can be disheartening. A savings goal of a million or more dollars can seem unreachable to younger workers with low incomes, high debts, and nothing in the bank.
Thinking in terms of the total amount of money you will need in retirement is daunting. But I believe if you break it down into small steps, it is much easier to swallow, says Shane P. Larson, CFP, a senior associate financial planner for Mainspring Wealth Advisors, which has five offices in Washington state.
Make A Realistic Budget And Stick To It
Making a plan for your money is an essential part of financial success, and if youre just getting by with living paycheque to paycheque, chances are you havent made a plan for your money. Having a plan for your money is basically the same thing as having a budget: it shows how much money you have each month, and where that money needs to go. This allows you to have more control over your money, so you can make choices that will benefit you and your finances in the future.
To make a budget, add up all your sources of monthly income. The next step is to tally up all your monthly fixed expenses , as well as your variable expenses . When youre making your budget, its also crucial that you include your retirement savings. By doing this, youre making saving for retirement a priority, instead of an afterthought.
If your expenses are less than what you earn, youre in good shape. But if your expenses exceed your income, its time to look for holes in your budget. Perhaps youre spending too much money, not earning enough money, or maybe its a combination of both. A budget will show you, in black and white, what youve been spending your money on, and itll also identify areas you can cut back on.
Once you get the hang of budgeting, its important that you review your budget periodically and keep it updated. If youve lost your job or your income stream has decreased, these changed should be reflected in your budget as well.
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What Funds Should You Buy
There are a variety of funds types to consider when saving for retirement. Here are the most popular options.
Actively managed mutual funds
These funds have been around for decades and are still the most-popular kind of security among retail investors. They hold a variety of stocks or bonds, and sometimes both, in one investment vehicle. Mutual funds are ideal for people who don’t want to choose their own stocks. Instead, a professional fund manager can do it for you. If you want to own a bunch of international stocks, but don’t want to pick individual companies, then buy an international stock fund. The same goes for tech stocks, U.S. stocks and corporate bonds there’s a fund for everything. The main drawbacks are fees and flexibility. Because someone else is doing the stock picking, fees are higher on actively managed mutual funds than on other kinds of investment vehicles. You also can’t buy or sell them during the day as they’re only priced after the market closes.
Index funds
Exchange-traded funds
Target date funds
Build your portfolio
A lot of people like investing on their own, but when it comes to retirement savings it’s a good idea to work with a financial advisor who has a certified financial planning designation. Here are a few things to look for in a good advisor.
Think about fees
How A Keogh Works
Keogh plans usually can take the form of a defined-contribution plan, in which a fixed sum or percentage is contributed every pay period. In 2022, you can contribute up to 25% of compensation or $61,000. Another option, though, allows them to be structured as defined-benefit plans. In 2022, the maximum annual benefit was set at $245,000 or 100% of the employees compensation, whichever is lower.
A business must be unincorporated and set up as a sole proprietorship, limited liability company , or partnership to use a Keogh plan. Although all contributions are made on a pretax basis, there may be a vesting requirement. These plans benefit high earners, especially the defined-benefit version, which allows greater contributions than any other plan.
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How A Simple Ira Works
The SIMPLE IRA follows the same investment, rollover, and distribution rules as a traditional or SEP IRA, except for its lower contribution thresholds. You can put all your net earnings from self-employment in the plan, up to a maximum of $14,000 in 2022, plus an additional $3,000 if you are 50 or older.
Employees can contribute along with employers in the same annual amounts. As the employer, however, you are required to contribute dollar for dollar up to 3% of each participating employee’s income to the plan each year or a fixed 2% contribution to every eligible employee’s income whether they contribute or not.
Like a 401 plan, the SIMPLE IRA is funded by taxdeductible employer contributions and pretax employee contributions. In a way, the employer’s obligation is less. That’s because employees make contributions even though there is that mandated matching. And the amount you can contribute for yourself is subject to the same contribution limit as the employees.
Early withdrawal penalties are hefty at 25% within the first two years of the plan.
Pay Off Your Debts And Give Your Credit Cards A Break
If you want to enjoy a comfortable retirement, you need to make debt-free living a priority. There are many of us out there who think we have to either save for retirement or pay off debt, but if you can budget smartly, theres no reason why you cant do both. If you can start to reduce your high interest credit card debt now, youll free up more money to put towards your retirement fund. Plus, if you can pay off your debts now, you wont have to worry about shouldering debt payments in your retirement.
One of the best ways to pay off debt is to stop using your credit cards. Studies have shown that we tend to spend more when were out shopping with a credit card than if we were shopping with cash. After all, its much more convenient to swipe and tap our credit card than it is to take out cash from our wallet and watch it disappear into a cash register. And with credit cards, there are also interest charges and fees you need to account for. So, stick with cash for a few months. Youll be surprised by how much money youll free up for your retirement fund.
If youre ready to tackle your debt, here are some debt repayment tips to help you get started. It also doesnt hurt to speak with a professional to get some advice on how to pay off debt. A local non-profit credit counsellor located near you would be happy to go through your finances with you and help you put together a plan to pay off debt so you can start saving for retirement.
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Check Your Other Options
To me, an IRA is a smart and simple way to get started, but there are a couple of other ways to save depending on your circumstances:
- If you’re self-employedSEP and SIMPLE IRAs and Individual 401s offer sole proprietors and small business owners a way to increase the amount of money they can contribute to retirement each year. Each is relatively easy to set up, has higher contribution limits, and offers a lot of flexibility.
- If you have a high-deductible health planIf your health plan has a high annual deductible , you may qualify for a Health Savings Account . Similar to an IRA, an HSA lets you make annual contributions and offers significant tax perks. It’s a way to save for current healthcare costs as well as for the future and can be a great complement to an IRA.
- If your state offers an auto-IRASeveral states have recently implemented retirement programs to help workers save, including auto-IRAs, retirement marketplaces, and multi-employer plans. Auto-IRAs require employers who don’t offer retirement plans to automatically enroll their employees in a Roth IRA and deduct contributions directly from their paychecks, similar to a 401. Workers can decide to opt out once enrolled. Some programs are entirely voluntary for workers. Check to see what type of retirement savings program your state may offer if you don’t have one at work.
Can I Count On Social Security
Social Security is spoken about as though its constantly imperiled, but things are not quite that dire. That said, Social Security benefits will not be enough to secure a comfortable retirement, either at their current levels or at the reduced levels likely by the time people currently in their 20s or 30s are set to retire .
Social Security will likely be available in some form, but its hard to say exactly what form that will be. Its exceptionally popular with both Republican and Democratic voters, so cutting it is verrrrrry unlikely, but Republican lawmakers hate it, so increasing its funding is going to be hard. As such, its best to keep it out of your retirement planning altogether. Think of it the way you would a potential inheritance as something nice to have, but not absolutely essential.
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Faqs On Retirement Planning
The monthly CPP/QPP retirement pension you will receive is based on how much you have contributed and how long you have been contributing at the time you start to receive benefits. The amount you receive is also affected by your age when you start receiving your retirement benefit.
- To get an estimate of your CPP retirement benefit, request your CPP Statement of Contributions by registering for a My Service Canada Account online or request a copy of your statement from Service Canada by mail.
- To see your personalized QPP entitlement, request your Statement of Participation in the Québec Pension Plan by registering for a clicSÃQUR account online or contact Retraite Quebec by mail.
According to the 2019 RBC Retirement Myths & Realities poll, conducted by Ipsos, Canadians age 50+ with investable assets of $100,000+ have an average of $674,000 in retirement savings. However, when asked what they would like to save for retirement, survey participants said they would like to have a total of $949,000 in savings.
An annuity is a financial contract between you and an insurance company. You deposit a lump sum with the insurer to an income option) and, in return, receive guaranteed payments of a pre-determined amount. Each payment is a combination of a return of the original capital and interest income. Only the interest income is taxable. When purchasing an annuity, you effectively transfer all of the risk of investing to the expertise of the insurer.
How Can I Save For Retirement Without A 401
Dear Carrie,
I’m 27, and my husband is 32. We’re starting to think about saving for retirement. He has a 401 at work, but I’m a hairstylist at a small salon that doesn’t offer any retirement benefits. What’s the best way for me to save?
A Reader
Dear Reader,
Starting to save for retirement early is one of the most important things you can do, so kudos for some smart thinking. At your age, if you save just 10%15% of your annual income from now until you reach retirement age, you should be in pretty good financial shape. At your husband’s age, he might consider bumping that up to 15%20% if he’s just beginning to save in his 401.
Your husband is lucky to have a 401. It makes saving easier because the money is automatically deducted from his paycheck each month. Plus, he may get an employer match . But like you, not everyone has that opportunity. Currently, about a third of Americans don’t have an employer-sponsored retirement plan. But that shouldn’t keep anyone from starting to save. It may take a little more effort and discipline to create your own retirement plan, but it’s well worth it. Here’s what I suggest.
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$1 Could Grow To Much More By Retirement
This chart shows that a $1 contribution will compound more if you give it more time to grow. If you contribute $1 at age 20, it could grow to $5.84 by the time you’re age 65. If you contribute $1 at age 25, it could grow to $4.80 by the time you’re age 65. If you contribute $1 at age 30, it could grow to $3.95 by the time you’re age 65. If you contribute $1 at age 35, it could grow to $3.24 by the time you’re age 65. If you contribute $1 at age 40, it could grow to $2.67 by the time you’re age 65. If you contribute $1 at age 45, it could grow to $2.19 by the time you’re age 65. If you contribute $1 at age 50, it could grow to $1.80 by the time you’re age 65. If you contribute $1 at age 55, it could grow to $1.48 by the time you’re age 65.
