Tips for saving for retirement

A poll conducted by Harris/Decima on behalf of CIBC suggests that 44 per cent of all Canadians approaching retirement age are not financially ready to do so.

With an unstable market economy, the poll suggests saving for retirement is getting more and more difficult.

According to Statistics Canada, one-third of retired Canadians are still in debt.

The provincial government seniors website says that in 2009, 56,500 seniors were employed in Alberta, accounting for 2.8 per cent of the Alberta workforce. Of these employed seniors, 58 per cent worked full time. The average hours worked by employed seniors was 28.6 hours per week.Financial experts say that nearly half of all Canadians, especially Baby Boomers entering retirement age, are ill prepared for the retirement lifestyle they would like to enjoy. Young people, they say, need to start planning for the retirement they want as early as possible.
Photo courtesy of: Alan Cleaver, via Flickr

The website also says that in the 2000- 2004 period, Alberta had the second-highest median retirement age — 67 — next to Saskatchewan.

Planning early

Financial experts say that Canadians need to start planning for retirement as early as possible in order to keep their golden years golden.

How much to save for retirement varies from person to person, depending on what kind of lifestyle you wish to live and how much debt you may carry with you into your retirement, says a poll conducted by TD Waterhouse on retirement realities. This is why they strongly suggest consulting a financial advisor to determine what your expenses will be in retirement.

An article published online for Maclean’s Magazine on Jan. 31 says it is also becoming more difficult for “Generation X” to save for retirement early on in because they are more concerned with paying off debts such as mortgages, credit cards and student loans.

By the time a 25 or 30-year mortgage is paid off, scrambling to save for retirement may likely prove to be even more difficult. A balance of growing savings and paying off debts is ideal, beginning in your 20s.

Laura Parsons of BMO Financial Group writes that 42 per cent of baby boomers say they wish they had started saving much earlier in life. In addition, when asked what advice they would give to people in their 20s, boomers say it is best to open an RRSP as soon as possible and contribute to it yearly.

Growing savings, paying down debt

Sheila Walkington from Money Coaches Canada suggests a two-part system that involves investing in an RRSP or tax-free savings account, or TFSA, and taking any tax refund you receive to put down your mortgage. This way you can grow your savings while paying down debt.

Walkington suggests contributing to an RRSP if you are under 50 years old and still have 10 to 15 years before retirement, or are in the highest income tax bracket. You should also contribute if your employer benefit plan matches RRSP contributions or if the interest rate on your mortgage is less than four per cent.

She suggests contributing to a TFSA instead of an RRSP if you earn an income of less than $40,000 per year or if your income may grow in coming years. In the future, if your income increases, Walkington says you can shift your TFSA to an RRSP so you can get the largest tax break possible for your RRSP contributions.

Smart investing

The Investors Group, a financial planning company, suggests that because there are limits on how much Canadians can contribute to RRSPs and TFSA (a maximum of $5,000 per year), non-registered investments, which have no contribution limits, are also a smart way to keep a steady cash flow after retirement and are more tax-efficient.

Tax-effective savings include capital gains, dividends and real-estate related income.

The long-term benefits of investing outside of registered savings plans are being able to allow your registered savings to compound until age 71, when you are forced to withdraw the minimum amount per year.

The online Canadian Tax Resource says that living off non-registered investments in early retirement allows you to avoid having to withdraw from your RRSP early. All withdrawals are included in normal income and are subject to the full tax rate of that year.

However, money withdrawn from non-registered savings accounts is taxed only to the extent that the capital gains are realized. Only 50 per cent of capital gain is taxed as normal income. Therefore, withdrawing from this type of account will not affect your taxed income as much as if you were to withdraw from an RRSP. So government benefits such as Old Age Security, which is dependent upon income, are not as greatly affected by withdrawing from a non-registered account.

If you are five to 10 years from retiring, TD Waterhouse advisors suggest it is important to take stock of your savings plan, work with a financial advisor to monitor your investment progress, and form a strategy for maximizing your return on your RRSP. Also consider converting your RRSP to a registered retirement investment fund or annuity if it is time to do so and consolidate multiple accounts if they are with more than one institution, to avoid extra fees.

aquirico@cjournal.ca