At this stage of life a great many expenses will be coming to an end or may have already disappeared if you haven’t burdened yourself with unnecessary debt during the earlier stages of your working career.
If that is not likely to happen, you need to go back to your household budget and balance sheet and modify your financial strategies.
Once these financial obligations have been addressed, your free cash flow will be significantly higher than during your early working years.
Planning for your retirement now takes on an increased importance, yet many Canadians in this group still fall into the trap of taking their retirement for granted.
Some never give it a passing thought, some want to live for today and let the future take care of itself and some simply believe that the government will take care of them. All of these mindsets are dangerous to your financial health and your lifestyle in retirement.
A survey conducted by Leger Marketing for CIBC in July 2012 found that fewer than half of Canadians between the ages of 50 and 59 had less than $100,000 saved for retirement. The same survey found that 53% of Canadians planned to continue working after retirement. One-third of those who anticipated working in retirement would do so for the money.
At some point the light does go on for everyone. For some it is too late.
They are already in retirement and realize there will be a shortfall. It is a painful experience to realize that the next twenty-five years of your life could be at a standard of living far below expectations.
The earlier the light goes on, the more likely that the goal of a comfortable retirement will be achieved. Review your household budget and your net worth. These documents provide a reference point for the state of your current financial situation and the progress that you are making.
It is during this time of your life that serious savings for retirement can and need to begin. There is not a magical age at which this happens because the other major commitments for each of us disappear at different times. It is an argument for tackling those commitments early to allow the retirement savings to begin as soon as possible.
While it may be extremely difficult for someone who is thirty-five years old to justify saving for a retirement that is thirty years in the future, they will look back happily at their decision to plan early.
A review of your current financial situation can bring that into focus.
If you have significant debt or are adding to your debt burden at this stage of life, you need to re-evaluate your financial situation. Develop a comprehensive plan to get yourself back on track as soon as possible. If you don’t know where to begin, find a financial advisor who can help you with your situation.
Now is the time to prepare more detailed financial projections. Visualize your retirement lifestyle and estimate what kind of income you will need to fund that lifestyle. From there you can determine with some degree of accuracy how much capital you will need to accumulate and with that information you can calculate how much you will need to set aside on a monthly or annual basis.
Any excess cash flow can be directed toward building your investment portfolio. You may have begun an investment program earlier in life even if you did not have any defined goals in mind. With the benefit of a plan, those objectives become more clearly defined and it becomes an easy step to accelerate your investment program.
A common approach
In the beginning many investment plans start with an RRSP contribution.
For many, it is simply a way to reduce the amount of income tax we pay each year with no long term goals in mind. Everyone likes a refund at tax time and the deductions we are able to claim for our contributions are a strong incentive. Although that approach is better than not making a contribution, it is an aimless strategy.
While the deductions may be an incentive, the real reason we should be making these contributions is to accumulate enough savings to help fund a comfortable retirement.
As it is, most people contribute far less than what they are allowed.
In 2008 the median contribution was about $2700 (http://www42.statcan.gc.ca/smr08/2011/smr08_154_2011-eng.htm), far less than the average contribution limit. It is clear that despite incentives, Canadians are not maximizing their RRSPs. Maybe they don’t need to, but without a plan, how can they be sure?
Clearly, by providing us with incentives to invest for the long term, our government wants us to take on more responsibility for financial independence in retirement. The fact that they have introduced tax-free savings accounts (TFSAs) to supplement RRSP accounts as a means to save for retirement underscores that view. So do the impending changes to the Canada Pension Plan and Old Age Security. (these changes to CPP and OAS have since been modified by the Trudeau government)
If you have not already done so, establish some long term objectives and begin a serious plan for saving for retirement. Your contributions to your program can be monthly, on a lump sum basis or a combination of both.
The goal is to accumulate capital for your retirement and to monitor that progress.
You will probably be in a higher tax bracket than you were earlier in life and maximizing RRSP contributions should be a priority. Your TFSA should also be a priority. If you haven’t already done so, you can make up for contributions missed in previous years.
There are those who are fortunate enough to have sufficient assets and disposable income to fund a taxable investment account in addition to their RRSP account and their TFSA. If you are in that group, examine the impact of taxes on your investment decisions.
For those without pension plans, a general rule of thumb when saving for retirement is to maximize your RRSP contributions first, followed by contributions to your TFSA, and only then should you begin to contribute to a taxable investment account.
Your life insurance needs should be reduced at this point. If your mortgage is not paid, the amount owing should be far less than it was and you should no longer need to be funding educational savings plans.
These reduced commitments, along with your ability to generate income from investments, offset the need to maintain a policy that provided the same benefits as required earlier in life.
One form of insurance worth examining is critical illness insurance. It differs from life insurance in that it provides you with a benefit while you are still alive. If you contract a critical illness covered by this type of policy, you may be eligible for a lump sum cash benefit to be used for whatever purpose you desire.
• A Notice of Assessment is issued by the Canada Revenue Agency after you have submitted your tax return. It usually arrives in May or June and will tell you what your RRSP contribution limit will be. You have until the end of February the following year to make that contribution for the current tax year.
• Contribution limits are up to 18% of earned income but the average Canadian contributes less than $3000 per year.
• The need for life insurance may be reduced at this point in your life.