If you have parents or grandparents who are dependent solely on a government pension, you will know how important saving up for retirement is. The average retiree in Canada, above the age of 65, receives a maximum of $1200 a month. Compared to the cost of living, cost of medications, and lack of affordable housing, that doesn’t get you very far. Now imagine what that will look like by the time you retire…yep, it’s a little, ok, a lot, scary!
Here are the best ways to save for your retirement, even while on a small income.
START NOW
Starting now, well after you finish reading this, is the number one way to save enough for retirement, especially while on a budget. Here are the benefits when you start saving for retirement early.
- You can put aside less monthly so that you aren’t spread too thin.
- You will earn a more considerable amount of compound interest.
- A larger compound interest means you can save less and make more; here’s how it works.
- If you have ten years to save until you retire, and you save $480/month, you will end up with $74 540 in savings and $16 940 in compound interest. That’s a total of $91 480, at the large and heavy expense of almost $500 a month.
- If you have 20 years to save and put away $181 a month, you will end up with $74 400 in savings and $30 960 in compound interest. That’s a total of $105 360, at the very manageable expense of $181 a month.
PLAN CAREFULLY
Retirement plans differ according to who you are, how much you can accrue, and how much you plan on needing. While settling down with a well-padded bank account may seem like a great idea, you don’t want to struggle for the next 20-40 years in an attempt to make that happen. Follow these guidelines to ensure you save the right amount in the best way possible.
- How Much | Carefully consider how much you will really need when you retire. While most people assume they will only need about ¾ of what they usually spend, that can be faulty reasoning. “Such an assumption is often proved to be unrealistic, especially if the mortgage has not been paid off or if unforeseen medical expenses occur. Retirees also sometimes spend their first years splurging on travel or other bucket-list goals.” – Investopedia.com You will be wise to ask yourself the following questions.
- Do you have travel plans for when you retire?
- Will you have leftover loans or a mortgage to pay off?
- Do you plan on lending financial support to your children or grandchildren?
- Age You Retire | The age you plan on retiring at will also influence your process. For example, giving yourself an extra two years by retiring at 67 will significantly reduce the amount you need to save monthly.
- Inflation Matters | Don’t forget to account for inflation when setting your total retirement goal. The cost of living always rises, and you don’t want to underestimate your needs for the future. Canada.ca explains it this way,
- Suppose you plan to retire in 20 years. You want to save what $50,000 buys today.
- Based on an inflation rate of 2% per year, it will take $74,300 in 20 years to buy what costs $50,000 today.
WHERE TO SAVE
It is an uneasy feeling trying to decide what avenues of saving or investing in your retirement fund are best suited to your plans. You can take a variety of approaches, including the following.
- Tax-Free Savings Account | If you are just starting out and trying to put minimal amounts aside, you can 100% use a TFSA. You can also set up your retirement fund across multiple avenues while keeping a base of savings in your Tax-Free Savings Account. The upside is you can withdraw whenever you see fit. The downside is that the government caps the annual contribution amount.
- Investment Avenues | Investing is an excellent way of adding growth to your retirement fund. You can invest in a Canadian Savings Bond, Exchange Traded Fund (ETFs), Guaranteed Investment Certificates (GICs) or Stocks. Some of these investment options are risk-free, while the others may be high-risk depending on circumstances. Be sure to consider investment options with your bank or other financial advisor.
- Registered Retirement Savings Plan | RRSPs are the standard for planning your retirement fund. Your contributions are tax-deductible, growth is tax-free, you can convert your RRSP to individual payments when you retire, and spousal RRSPs reduce your combined tax burdens.
MAKE A BUDGET
It can be challenging to save for retirement, especially when you have your share of monthly expenses. Car loans, mortgages, utilities; just the basics can feel overwhelming. Writing it all down and creating a budget will help diffuse the stress of managing it all simultaneously, as well as provide a visual reminder of what you are working towards. We’ve written a lot when it comes to creating a budget. Here are the most important aspects to consider when setting your budget.
- Budget Type | Select a budget type that works with your personality and strengths. For example, if you have a hard time controlling spending, the envelope method might work best for you. If you are forgetful when it comes to tracking or record keeping, use a mobile budget app to automate the process.
- Spending Habits | Reducing excessive spending is a fool-proof way to ensure you have enough money to cover the basics, including your retirement fund. Try the following suggestions to curb spending.
- Reduce the frequency of purchases. If you usually buy coffee every morning, try only getting your latte on Friday mornings instead.
- Remove your payment information from your devices and keep that information out of reach. If you tend to shop online at night, we can guarantee you’ll think twice if you have to get out of bed to find your credit card information.
- Planning ahead can reduce spending. For example, creating a weekly meal plan will significantly reduce the amount you spend on groceries. Not only will you be more likely to stick to your shopping list, but you will also avoid those “what are we gonna eat” last-minute take-out or delivery expenses.
- Purge and Reuse| You can add to your savings cashflow by purging your old and no longer used items, selling them on a local community website. Before you buy new furniture or household items, consider what you already have on hand. Can you repurpose items you aren’t currently using or that no longer suit their original purpose? You can also try hosting a virtual clothing and home goods swap with your friends.
Experts agree that the most challenging part of setting up a successful retirement plan is finding the balance between what you want and what you can realistically achieve. Therefore, the winning strategy is to keep your retirement plan flexible while doing your best to maintain an affordable lifestyle now, keeping debt to a minimum.
You can consider a small online loan to get your retirement fund started. 24Cash is a Canadian company supporting hard-working residents to achieve the life they deserve. You can trust our experience, discretion and human service.