Saving for retirement is a universal goal, but how you do it depends largely on your current age, as retirement strategies will differ by life stage. Obviously, someone in their 20s has a different view of retirement than someone in their 60s. Let’s consider components of a sound retirement strategy, based on age group.
In your 20s: Benefit from compound growth
You’re typically transitioning from school and entering the workforce. While retirement doesn’t seem like a high priority, it’s actually an ideal time to start saving and investing. A general goal is to save roughly 10% of your gross salary. Since you have many years to accumulate and build wealth through the power of compound growth, you can also be relatively more aggressive with your investments.
Over the long run, stocks and equity mutual funds tend to generate attractive growth. Knowing time is on your side can help you withstand the ups and downs of investing. Also prioritize paying down student loans and other debt, since this will reduce interest payments and help build your credit score. If you can contribute to registered plans like RRSPs and TFSAs – even a few dollars a month is valuable – your retirement nest egg will start early and benefit from compound growth.
In your 30s: Stay focused
As you become more established in your career, your earnings have likely increased, as well as your other financial responsibilities. Maybe you hold a mortgage, are saving for a down payment or have a car loan or credit card debt. You might be married, supporting a young family. It’s a good time to engage a Financial Advisor to help with budgeting and achieving a balance between meeting current financial obligations and saving for the future. An advisor may also help you establish multi-goal planning to address your shorter-term objectives and longer-term goals like retirement, which often is not prioritized when trying to manage existing debt obligations.
If you didn’t get a chance to start contributing to an RRSP or TFSA in your 20s, now’s the time to begin planning for retirement. Many workplaces also provide pension plans or group RRSPs, so try to take advantage of these savings vehicles, especially if your employer offers some form of contribution matching. After reviewing your budget and various financial goals, consider saving about 15% of your gross salary towards retirement. The goal is to slowly contribute to your retirement savings and not touch it over the years, allowing you to methodically build your nest egg and continue benefitting from compound growth. At this life stage, you can still be relatively aggressive with investing as your time horizon remains favourable.
In your 40s: Mitigate lifestyle creep
Since earnings often continue rising in this decade, you may have more opportunities to reduce debt and invest for retirement. Many people tend to increase their spending as their discretionary income rises. Many individuals change their spending habits by dining out more, buying a bigger property or more luxurious car, etc.
Lifestyle creep happens slowly and many may not be aware of it. There’s an opportunity here to continue contributing to your retirement savings and enjoy your earnings, by reviewing your budget regularly and integrating a comprehensive retirement strategy and estate plan into your financial plan. Also, we can review your financial goals and reprioritize where necessary as you and your family reach various life milestones.
In your 50s: Stay the course
Retirement is no longer an abstract concept. Amid a shorter time horizon, it’s important to manage expenses, pay down debt and save for impending retirement. Taking into consideration workplace pensions, government pension benefits and personal savings, you should now have a sense of how much retirement income to expect.
If you’re an “empty nester” or your children will soon be pursuing post-secondary education, consider whether it makes sense to downsize your home and use some of the proceeds to augment your retirement savings. Similarly, many people in their 50s receive an inheritance, and that can also be directed toward retirement savings.
In your 60s: Plan ahead and reduce risk
Your decades of hard work, disciplined saving and regular investing are about to pay off. Assess your current finances and review your retirement strategy needs to focus on retirement income streams. I can help you understand your retirement cash flow situation and determine the best time to start receiving Canada Pension Plan benefits. Having debt can impact your retirement income, so it’s helpful to manage this risk by paying off as much debt as possible.
Other important things to consider are your overall health and potential life expectancy, whether you plan to continue working (full time, part time or running your own business), and if you’d like to stay in your own home. Retirement may last for decades, so your savings and income should reflect that possibility, especially if your health/personal care needs change. Estate planning – including a Will and arrangements for powers of attorney – is also important. Be sure to communicate your estate plan to your heirs.
Contact our office today to discuss what retirement strategies are appropriate for you.