Do you think you’ve saved enough for retirement? Do you think you’ll ever retire? Research from such organizations as the Conference Board of Canada shows that Canadians approaching retirement are more worried than ever about their ability to fund their golden years. I’ve identified three key areas where the anxiety is the highest, and proposed some solutions.
1. Too Much Debt
Too many seniors are living beyond their means in ways previous generations were not. Too many retirees have too much debt because of dream homes, caring for their parents, and spending on adult children who don’t leave home.
Watch for growing credit lines and live within your means, even if it means buying a slightly used car and taking vacations in the offseason, when kids are in school.
Use debit, not credit. The debt problem is especially dangerous because people are generally predisposed to be optimistic. What happens when you have debt and lose a job or have health issues that cause financial difficulties? Your debt becomes something that could turn into bankruptcy. That’s a time bomb waiting to go off. Diffuse it now before “life” happens and you’re in real trouble.
Interest rates are very low and are expected to remain so, but think what would happen if your rates went up two percentage points. On a $400,000 mortgage or large credit line, that would make a big difference.
2. Tied to the Family Home
Many Canadians have far too much of their net worth tied up in real estate. If you can afford the million-dollar home and still have assets and good retirement income, then you can stay in the family home longer.
On the other hand, if selling that big home and downsizing to a townhouse or condo would simplify your life or put $300,000 or more into your bank account to live on, that could make a big difference in your retirement lifestyle. You could do some of the things you thought you couldn’t afford.
It’s much easier to travel without worrying about the grass to cut, snow to shovel, and the countless other issues that come with home ownership. Renting is an option too.
3. Not Saving
Start saving as soon as you start a full-time job. Usually real estate is the first big purchase, because Canadians love home ownership, plus it’s a great investment that is like a forced savings plan. Then RRSPs, TFSAs, RESPs, and non-registered investments can all be considered, depending on your income and circumstances.
That is for you and your financial advisor to determine. But the sooner you start, the better, as you’ll be using the power of compounding to your advantage. As a rule of thumb, to start with, you should save about 10 percent of your total annual income.
Invest in assets that are likely to appreciate over the long term, like your principal residence. For long-term retirement savings, make maximum use of registered plans like RRSPs and TFSAs for the tax-deferral benefits. And use non-registered accounts for flexibility and to take advantage of the favourable taxation of capital gains and dividends.
A flashy car that depreciates the moment you leave the car lot and depreciates further each year isn’t an investment, and it’s not much of an asset either. The same goes for all those gadgets (the latest smartphones, tablets, gaming equipment, and leading-edge TVs, for example). If you are buying these, but telling yourself you have no money to invest in your future, something is amiss.
Retirement planning isn’t about doing without and living like a pauper. It is about balance, living within your means, and not paying more income tax than necessary. It is about saving consistently throughout your working life so you have the financial means to retire when you want and do what you want in retirement.
It is also about protecting your wealth and family with adequate life insurance and disability insurance. Bottom line: It’s all about investing and protecting and minimizing income tax.
Courtesy Fundata Canada Inc. © 2014. Bruce Loeppky is a financial advisor based in Surrey, B.C. This article is not intended as personalized advice.