Today, I have a guest post from Clare, money-saving writer on Canadian shopping site, Bargainmoose.ca. On Bargainmoose, they share the latest shopping deals, freebies and coupon codes, helping Canadians save cash while they spend.
Clare is going to be writing about retirement; specifically about how much money you really need to save for that time of your life.
How Much Money Do You Need to Save for Retirement?
This is a common question about which people may worry, but not actually do anything about – how much money do you need to save for retirement? Let’s face it, we don’t think about retirement every day because we’re too busy thinking about our busy day-to-day lives.
Unless you have a gold-plated defined benefit pension, however, you should likely start thinking about retirement… as soon as possible. If we don’t think about retirement or financial independence, we don’t actually set goals to get to where we want to be… and a suddenly, a decade later, we come to the realization that we haven’t made any progress toward that goal. Therefore it’s a good idea to start thinking about retirement or at least start crunching the numbers to see how much you would need.
The Financial Consumer Agency of Canada recommends that you budget for 60 to 80% of your current working salary in retirement (in order to retire comfortably). This is reduced from 100% of your current working salary because it is assumed (and hopeful) that you have paid off your mortgage when you retire, since the mortgage the largest expense that we have during our working career. Of course, if you plan to continue renting, you may need to save more for retirement.
Service Canada has a retirement income calculator that you can use to calculate how much you would need to save for retirement. It is helpful because it includes the OAS and CPP benefits that you will be receiving, and calculates what you estimated annual income in retirement will be depending on your current RRSP assets, whether you have a group RRSP plan or a defined benefit plan etc.
This is important to consider because CPP benefits do not start until the age of 60, where you can receive a reduced CPP if you start withdrawing before age 65. In addition, it is important to consider the Old Age Security Pension, which begins at age 67.
Now that we’ve talked about how much you would possibly need to retire comfortably, and you’ve likely had a mini-heart attack because of the amount of money you need to be comfortable, according to Service Canada, here are some important strategies on how to start saving for retirement. These tips will help you get you towards that goal:
Pay Yourself First
This is one of the most important and easiest ways to save. You need to make sure you’re not spending more than you’re earning before you pay yourself first, of course. Save a certain percentage of your income (ideally 10 to 25%+) to your retirement fund so that you can contribute to your TFSA or RRSP. Any contributions to your TFSA that are withdrawn are tax-free in retirement. You can also transfer your TFSA to your RRSP and get a tax deduction for the contribution. Use your tax refund if you have one to further save more, or pay down your mortgage debt.
Consider a non-traditional retirement
Many financially independent individuals continue to work, but not in the corporate world. Instead, they are becoming entrepreneurs (like opening up restaurants, creating websites, writing, etc.) and doing what they enjoy, doing what brings them passion. With this tactic, you likely do not need to have 60-80% of your working income in retirement because, technically, you will still be working (but in a different sense, and to your own pace).
Consider multiple income streams
Multiple income streams, like dividend income, investment real estate rental income, or even part-time income, can act as a supplement to the retirement funds. This helps create cash flow, which is the most important aspect of retirement, since work is no longer creating that income stream. These multiple income streams take time to amass and build up, so it is best to start as soon as possible.
In summary, financial independence is a dream for many (if not all of us). With discipline, knowledge, and determination, you can achieve financial independence. Retirement can be achievable years before the government expects you to retire (e.g. at 65 years of age), especially if you have time on your side.