Plan Your Retirement Early
Times have changed over the last few decades. Life expectancy is longer and the job market has transformed to the point that few people stay in the same jobs for their entire careers. Now more than ever, it's important to take your retirement financial security into your own hands.
If your annual income from public and private plans won't be high enough to maintain an acceptable standard of living when you retire, now's the time to take control and save what you'll need for your golden years!
Living Longer Requires More Income!
The average life expectancy for men is 79, and for women, 83. That means if you retire at 50, you'll have 30 good years of freedom ahead of you, and all the while you'll have to pay for housing, food, clothing, and a bit of fun!
Take a look at the following table for an idea of the number of years you'll have left after the age you want to retire. Give yourself 5 to 10 years more, since these are only averages and great strides are being made in the field of medicine.
Average years remaining1 for someone who retires at the age and year indicated
| Men |
| Year |
60 |
65 |
70 |
| 2010 |
24,4 |
19,9 |
15,8 |
| 2030 |
25,6 |
21,2 |
17,0 |
| 2060 |
27,0 |
22,4 |
18,1 |
| Woman |
| Year |
60 |
65 |
70 |
| 2010 |
27,5 |
22,9 |
18,5 |
| 2030 |
28,4 |
23,9 |
19,5 |
| 2060 |
29,1 |
24,6 |
20,2 |
Source: Actuarial Report of the Québec Pension Plan as at December 31, 2009
1. The average years remaining takes into account the improvement in life expectancy over time.
Of course, your retirement may be longer if you are one of the lucky retirees who live longer than average. It's easy to forget that approximately 50% of retirees live beyond the average life expectancy, and the following chart shows that 18% of men and 34% of women who retire at age 60 live to reach age 90. It's a good idea, therefore, to plan for a longer retirement by adding a few years (for example, 5) to the average life expectancy statistics.
Save Early So Your Savings Grow. Yes, But...
The key to a comfortable retirement is starting to save as early as possible to make your money work for you. Unfortunately, many people say their budgets are too tight or they prefer spending their money on recreation or purchases that bring them immediate satisfaction. But what will they do for the 20, 25, or 30 years their retirement lasts? Ask yourself the question!
Save Early and Regularly—the Magic Recipe!
Give yourself an edge by saving as early as possible. That's the best way to put money aside for your retirement and accumulate interest on your investments!
An Example
Contributing $45,000 to an RRSP over a 15 year period starting early could add up to $317,674 for Ms. Timely in the example below. If you start later and invest the double ($90,000) over 30 years, you could end up with only $251,405, like Mr. Tardy.
The time factor makes all the difference, since your interest is compounded (because you accumulate income on your returns). Ms. Timely can contribute $74,018 by the age of 40, then stop contributing altogether and let the compound interest do the work. In the end, Mr. Tardy, who contributed double the amount over double the period, will have $111,269 less.
|
Ms. Timely |
Mr. Tardy |
|
| Age at first contribution |
25 |
35 |
| Years of contribution |
15 |
30 |
| Annual contribution |
$3,000 |
$3,000 |
| Total contribution |
$45,000 |
$90,000 |
| Rate of return |
6% |
6% |
| Amount at age 65 |
$317,674* |
$251,405* |
| Difference |
$66 269** + $45 000 = |
$111 269 |
*Contributions at the beginning of the period
From the difference between the amounts accumulated at 65 ($317,674 − $251,405 = $66,269)
Estimate Using the "Rule of 72"
Even if you have no idea when you'll retire, it's still important to estimate how many years of work you have remaining.
By estimating the number of years and determining the annual income you'll need at retirement to maintain your standard of living, you'll be able to develop your savings plan accordingly. It's easy to calculate how many years it will take for your portfolio to double using the "Rule of 72." Simply divide 72 by the rate of return on your portfolio.
Contact Your Financial Institution for Advice
The most effective savings plan is making periodic investments. Most financial institutions offer plans or programs that let you contribute to an RRSP at the amount and frequency of your choice.
RRSP Loans: Be Careful!
If you don't have the cashflow to contribute to your RRSP, you can also consider an RRSP loan. This strategy can pay off if interest rates are low. However, there's always a risk involved when you invest from a loan rather than cash. If you borrow money to buy shares, you'll still have to pay back the loan and interest even if the value of your shares drops. And interest paid on an RRSP loan is not tax deductible. To maximize your return on investment, the expected performance should be higher than the rate on your loan.
Some financial institutions let you use your credit card to contribute to your RRSP, and even give you cheques to do so. But the interest you'll pay on the loan—generally the rate on your credit card—can be extremely high. For more information on this subject, refer to the information capsule on leveraged loans.
Investors with mortgages (nondeductible) are usually better off contributing to their RRSPs and using their tax refunds to pay down their mortgages. However, as your RRSP balance grows and provides a good cushion, remember that if the expected rate of return on your investments is lower than your mortgage rate, it's financially wiser to pay down your mortgage.