Even with the best of intentions, it's easy to get thrown off course when it comes to saving for retirement. After all, life happens — and before you know it, that early start has turned into a later-than-you'd-like start.
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There's good news if you're a late saver: It's never too late to start saving for your retirement. Coming up with a financial plan for your retirement is important no matter what age you are. But if you're in your 40s, 50s or 60s, there are a number of strategies you can use to build the retirement funds you need and make up for any lost time.
You don't need a personal finance degree to get started with your retirement plan. Whether you're 30 or 60, consider these first steps:
1. Talk to a financial advisor
If you've never invested your money before, the different investment possibilities can be confusing. A financial advisor can help you navigate the world of investing: they can help you develop a plan with investments that will help you build towards your retirement needs, regardless of your age.
Advisors can lead you through the various retirement savings options available and help you select the investment vehicles that will work best for you. They can also walk you through the rest of the first steps below, so you're not overwhelmed and tempted to stop saving before you start.
2. Assess your spending
Saving for retirement is like saving for anything else. Before you can earmark money for your retirement contributions, you need to know how you're currently spending that money.
People often feel like they don't have extra money to stash away in savings. But once you have a clear picture of where your money goes every month, you can decide which expenses to reduce so you can put more into your savings. (This is one area where a financial advisor can offer great guidance.)
Cutting out a $4 snack once a week might not seem like much, but the magic of compound interest works even on small amounts. Let's say you put that extra $16 into savings every month for 20 years. At 5% interest compounded annually, that $16 will have grown to $6,391.12.
3. Set savings goals
It's also a good idea to know how much you want to have saved up when you retire. There are a number of tools to help you estimate how much you'll need, like this retirement calculator.
Having a number in mind helps you to come up with a retirement plan with the help of your advisor. You'll see how much you need to put away each year to meet your main retirement savings goal.
Goal setting in this way will also help you see if your savings goal is possible with your existing income. If it's not, you might consider options such as re-evaluating your retirement lifestyle expectations, delaying your retirement to extend your timeline or downsizing your home.
4. Pay down your debt
Paying down debt is a vital component of saving for retirement. You'll want to start with your highest interest debt – for most people, this means tackling credit card debt first. According to the Canadian Bankers Association, 30% of Canadians carry a balance on their credit cards.1
Credit cards are a great financial tool when used correctly, and paying your credit card balance in full each month is a healthy financial habit to make part of your routine. It lets you take advantage of the short-term interest-free credit your card offers, without having an unpaid balance increasing your debt load.
5. Start saving
The last step is, of course, to start saving. And when it comes to retirement savings, this means you can leverage the power of registered savings accounts.
You can start saving for retirement by contributing to your Registered Retirement Savings Plan (RRSP). If possible, aim to max out your contribution each year. Your RRSP holds investments such as mutual funds and guaranteed investment certificates, and you keep the investment returns inside the plan. These investment gains aren't taxable until you withdraw funds from your plan. Your financial advisor can advise you on the ideal mix of investments to hold in your RRSP.
Did you know?
In 2022, the RRSP contribution limit is $29,210 and if you contribute less than your contribution limit for the year, you don't lose that contribution room.
You'll also want to take advantage of a Tax-Free Savings Account (TFSA). While TFSA contributions aren't tax-deductible, withdrawals from your TFSA are tax-free (this includes your investment returns). In addition to being a good place for your retirement savings, you can also use your TFSA as an emergency fund.
It's never too late to begin building your nest egg, because you can still take advantage of the power of compounding. But because you'll have less time for compounding to work, you might need to save more. This is where RRSP catch-up contributions can make a difference.
How does an RRSP work?
An RRSP can be ideal for holding your retirement funds because it's a tax-deferred account and RRSP contributions reduce the amount of tax you pay. You'll be taxed when you make withdrawals from your RRSP but since you'll be retired, you'll likely be in a lower tax bracket.
RRSP contribution room
Because an RRSP allows you to defer taxes, there's a maximum amount you can contribute each year called your RRSP deduction limit or contribution room. The RRSP contribution room limit is the lesser amount of either 18% of your previous year's income or the current year's RRSP limit (which for 2022 is $29.210).
The good news is, if you contribute less than your contribution limit for the year, you don't lose that contribution room. Unused contribution room accumulates and is added to the next year's deduction limit — meaning you can always take advantage of the maximum amount allocated to you.
You can find out how much unused contribution room you have in your latest Notice of Assessment from the Canada Revenue Agency (CRA) in a section called the RRSP Deduction Limit Statement. You can also find out this number by exploring other ways of finding your unused contribution room.
Make catch-up contributions
Your unused contribution room will determine the amount of catch-up contributions you can make to your RRSP. If you're starting late with your retirement savings, you might have a larger amount of unused contribution room. Using up this contribution room means you'll be able to save larger amounts on a tax-deferred basis.
Don't overcontribute to your RRSP
Starting the month of the over-contribution, the CRA imposes a penalty of a 1% tax if you contribute more than your limit plus the $2,000 buffer, so it's important to know exactly how much unused contribution room you have. You want to be sure you don't contribute more to your RRSP than you're allowed.
Life in your 40s looks different than it did in your 20s or 30s. You might be juggling parenting, working and being a homeowner. Retirement suddenly seems so much closer, but you'll likely work for another 20 years before retiring. That's still plenty of time for the power of compounding to work its magic.
In addition to the steps outlined above, the following are some of the strategies you can apply to start saving for retirement in your 40s:
Plan for tuition costs
If you have kids, you know you may have post-secondary expenses down the road. Plan ahead by opening a Registered Education Savings Plan (RESP) for your child. While you won't get a tax deduction for your RESP contributions, the amounts withdrawn — including investment returns — aren't included in your income. Instead, they're included in your child's income as an Educational Assistance Payment (EAP). With this in mind, it's always a good idea to check if you're maximizing your RESP contributions.
Did you know?
The Canada Education Savings Gran (CESG) currently offers 20% of your yearly RESP contributions, up to a maximum of $500.
An RESP also lets you take advantage of the Canada Education Savings Grant (CESG), which is based on the amount you've contributed each year. Currently, the grant offers 20% of your yearly RESP contributions, up to a maximum of $500. Your financial advisor can help you determine the optimal amount to contribute.
Automate your savings
Opening up an RRSP or TFSA is a great step in saving for retirement. But one of the keys to growing your retirement savings is regular contributions. The best way to do this is to set up pre-authorized contributions to your RRSP. The convenience of this set-and-forget approach makes it easy to grow your retirement funds.
Employer RRSP match contribution programs
If your employer offers an RRSP matching program as part of your benefits, you may want to enroll. Your employer will make a contribution to your RRSP (or a group RRSP) that matches your contributions, up to a specified amount. Try to make sure you're contributing enough each month to take advantage of the full amount your employer will match.
There are financial advantages to entering your 50s. You likely have less child-related expenses, and you're probably coming into your highest income-earning years. And while you're off to a late start, there's still time for the magic of compounding. It'll be harder, because you'll need to save more — you'll be in catch-up mode — but it's doable.
The following retirement savings strategies will give an added boost to the basic steps of saving for retirement:
Reduce your debt load
When you're in your 50s, minimizing your debt load becomes even more crucial. Remember, your mortgage is also debt you can work on reducing as you pay it down. Even if being mortgage-free by the time you retire isn't a realistic option, reducing your mortgage can make a big difference once you're retired. And if you currently have other debt, such as credit card debt or small loans, your Scotiabank advisor can walk you through options to consolidate this debt and pay it off faster.
Maxing out your yearly RRSP contributions is good step. But you should also try to use up your unused contribution room. The power of compounding is still working in your favour – you just have to save more to see the magic.
Be smart about asset allocation
It's tempting to hold riskier investments in your RRSP because they promise a greater rate of return, but asset allocation becomes more important as you get older. Asset allocation — the process of diversifying a portfolio by combining different asset classes such as stocks, bonds and cash equivalents — can help reduce your overall portfolio risk and lower the impact of day-to-day market volatility. This is because the losses from poorly performing assets may be offset by others that are performing well.
Selecting the right asset allocation for your goals and risk tolerance is one of the most important and impactful investment decisions you can make. If you're unsure about what investments or mutual funds to hold in your RRSP, ask a financial advisor for help picking the right allocation for your age and risk tolerance level.
If you're in your 60s and haven't started saving for retirement yet, there's no getting around it: It's not going to be easy. But it's not impossible, either.
It will take commitment – and ultimately, more savings in a much shorter period of time – to reach your retirement goals. So be clear about your financial plan for retirement and commit to making saving a priority.
Start saving with the basic steps outlined above, and use the following strategies to help you build the retirement funds you need:
At this stage, eliminate your debt load if you can. Your income will be lower in retirement. Eliminating interest expenses from your retiree budget — for example, interest on credit card debt — will help free up your retirement income for more important things.
Delay your retirement
You might consider pushing out your retirement date if you're starting late with your retirement planning. Retiring later gives you a longer time horizon for compounding to work – and you can continue making RRSP contributions until you're 71. Speak with your financial advisor to see the effect a later retirement date will have on the value of your RRSP.
You could also consider delaying your government pension plan payments (Canada Pension Plan/Quebec Pension Plan and Old Age Security) if possible. Delaying these payments means you'll receive a larger amount than if you started drawing from these plans at age 65.
You can defer government pension payments for up to five years. You could also look into other government programs, such as the Guaranteed Income Supplement (GIS), that might be available to you, to have a better understanding of your retirement budget.
No matter how old you are, now is always the best time to start saving for retirement. Talk to a Scotia advisor today. These professionals have the financial planning and wealth management knowledge to help you put together a retirement plan that works for your specific needs.
By taking the first steps towards planning for your retirement — whether you're in your 40s, 50s, or 60s — you can be well on your way towards reaching your retirement goals.