Planning for retirement: Why now is the best time to start
The best time to start planning for retirement is today, even if you're just getting started in your career and it seems like you don’t have a lot of cash to spare. The more time you give yourself, the longer you have to save money, and the longer you have to invest your savings.
Your RRSP is an important part of your retirement plan
When it comes to investing your savings, an RRSP can be one of the best tools you have. There are two major reasons for this:
You can save on taxes every year that you contribute. The money you contribute to your RRSP is tax-deductible, which helps to lower your annual taxable income and can even set you up to receive a tax refund. In fact, 51% of Canadians cite tax savings as a key reason they contribute to their RRSP1, footnote 1.
Your investments grow tax-free. With an RRSP, your money grows on a tax-deferred basis, so any investment gains you make won't be taxed until you take money out of your account. The goal is to withdraw your money in retirement, when your income is lower, allowing you to pay less taxes overall. That’s why 83% of Canadians agreed that withdrawing from your RRSP before retirement was a last resort1, footnote 1.
As great as they are, remember that an RRSP is just an account. Once you open one you’ll still need to buy some investments.
Saving vs. investing for your retirement
Investing your money can offer higher returns than a savings account, which is why it should be such a big part of your long-term retirement planning. Basically, investing can help you save for your future, faster.
With a savings account, you put cash in there and watch it grow at a modest interest rate. With an RRSP, you can hold a bunch of different types of investments – including mutual funds, cash, stocks, bonds, GICs, and Exchange Traded Funds (ETFs) – that can help you see higher returns. All of these products have their own pros and cons, and let’s be honest, choosing which ones are right for you can be a bit overwhelming. So if you want some help finding the right investments, talk to a financial planner. They’re the experts.
Investing early can have a major impact on your retirement
Let’s say that you’re 25 years old. You want to retire to a beach house at age 65. That gives you 40 years to save and invest for your retirement.
According to our savings calculator, if you save $500 a month for 40 years and earn an annual 6% on that money, you’d have $995,745 to fund your retirement.
The beauty of long-term investing is this: You only had to contribute $6,000 a year, for a total of $240,000. You earned $755,745 from compound returns on your monthly contributions over time.
To earn that 6% return, however, you'll need to look beyond a savings account, and that means investing your money.
How to start investing for retirement
If you haven't started planning for retirement yet, don't worry. Now's a good time to start! You can work your way through these five steps:
Think about your retirement goals. When do you want to retire? What kind of lifestyle would you like to have? This will help you understand how much you'll need in retirement, and guide your investing decisions.
Meet with a financial planner. A financial planner can take a holistic look at your financial situation and your goals to help you figure out the logistics of your retirement plan, including how much you can comfortably save every month. From there, they can also help you understand your investment options, and even set up automatic regular contributions.
Make regular contributions. While 60% of Canadians save money on a monthly basis, only 36% invest at least once a month1 – even though investing should be a key part of your retirement plan.
Make investing in your retirement part of your regular routine. If you set up automatic contributions (or ask your financial planner to do it for you), you can make life even easier. As an added bonus, one of the best ways to guard against risk is to contribute a set amount every month over the long term. That way, if the price of your investments goes down, you're buying more for the same amount of money. This strategy is called dollar cost averaging.
Know and stay within your RRSP contribution limit. Your annual tax return will show you how much contribution room you have for your RRSP, and you can also find your contribution room in your CRA MyAccount. It's important to only contribute within your available room, because you'll be charged a 1% penalty every month for over-contributions over $2,000.
Check in on your progress. Keep an eye on how your accounts are doing at least a few times a year, but remember to think long-term. If you have a big milestone, like a marriage, a new baby, or a new home, check in with your financial planner to see if you should adjust your plan.
Remember: The most powerful thing you can do for your financial future is to take your first step towards a secure retirement today.
Start planning for retirement today
Everyone is different when it comes to retirement. But no matter who you are, the best thing you can do for your financial future is to start taking advantage of the most powerful thing on your side: time. Book an appointment with a financial planner, or learn more about RRSPs today.
Taking the first step is the hardest part of planning for retirement. As an extra incentive to get started, keep an eye out for special offers during RRSP season.
