It’s never too early to begin planning for retirement, even if you just joined the workforce and started earning a regular income.
Sure, the idea of leaving work might seem remarkably distant right now, but that’s exactly what makes now a good time to start saving—you’ve got decades and decades ahead to benefit from putting your money to work and letting it grow.
If you’re eager to start planning for a secure and comfortable retirement but don’t know where to begin, here are a few simple things that can help put you on a path to the future you dream of.
Start with a rough plan for retirement, then work out how much money you’ll need
Particularly if you’re still young, no one expects you to have definitive answers about how and when you want to retire. Even so, it can be helpful to start thinking in general terms about the kind of life you hope to lead in your post-work years, as well as when you’d like to stop working. You can use those answers to get a sense of how much saving you’ll need to do to get there.
For example, you might envision a retirement full of travel, which has obvious financial costs. Some people look forward to a time when they can keep working, but at a slower pace and on tasks or projects that bring personal satisfaction, if not high income. Others just want a relaxed life away from the hustle and bustle, far from pricey urban centres.
It’s also helpful to think about other ways your financial situation will change in later life. Many retirees no longer have to make mortgage payments, and they obviously stop contributing to retirement savings plans. However, some costs typically increase, such as health care and long-term care. Other retirees use some of their savings to provide financial assistance to adult children or other relatives.
The last step is to get a rough idea of how much money you’ll need to afford the retirement lifestyle you envision. One rule of thumb is to multiply the number of years you might reasonably expect to live in retirement (say 20 to 25 years or more) by a figure that’s 80 per cent of your pre-retirement income. If you’re young, assume your income goes up two per cent a year until you stop working. If your final income is $100,000, you can expect to need $80,000 annually for each year of retirement, or $1.6 million for a 20-year retirement window.
Start making regular contributions into an RRSP and a TFSA
Perhaps the two most important and popular retirement savings options for Canadians are Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).
If you’ve got extra money in your budget, the best approach is to set up automatic contributions into one or both of these accounts every month, and direct that money towards investments that fit your risk tolerance, such as stocks and mutual funds. Automating the process means you don’t have to remember anything and smooths out the cost of your investment purchases through dollar-cost averaging.
RRSP contribution limits are set at 18 per cent of your income in the previous year, up to a fixed annual maximum that was just over $30,000 in 2023. Contributions to RRSPs are tax-deferred, meaning you don’t pay income tax on the amount in the year you contribute it, but you do pay tax when you withdraw the money in retirement. In the short term this can generate an income tax refund, which you can also stash away as retirement savings.
Additionally, because most people earn less as retirees than they did while working, their income tax rate goes down. That means you’ll end up paying less tax on the retirement ‘income’ you withdraw from your RRSP than you would have paid in the year you originally earned it.
Different annual contribution amounts have applied in various years since TFSAs launched in 2009, from $5,000 in the early years to a high of $10,000. In 2023, the contribution limit is $6,500.
While there’s no income tax break on TFSA contributions, there’s also no tax at all on any earnings inside your account, no matter when you withdraw it. Plus, even if you take money out of a TFSA to help pay for a short-term need, you’re able to repay the contribution in the following calendar year. Both RRSPs and TFSAs also allow savers to carry contribution room forward from year to year and catch-up on unused space at any time.
Build savings goals into your budget
The idea of reaching a retirement savings target of $1.5 million or more might seem daunting, but the best way to make sure you get there is by having a plan that identifies the need to put money aside for a period of life when you don’t want to have to rely on a regular paycheque.
Your future is too important to rely on irregular contributions that come from what’s ‘left over’ after other spending needs have been met (including all non-essential ones). As long as you’ve got the time ahead of you, it’s perfectly acceptable to start small and try to build up the amount you save for retirement as your income grows.