In an ever changing landscape of financial products and what retirement is, young people are encouraged to start saving early for retirement, as the obligation will fall increasingly on them to look after themselves…..
There is a big challenge ahead for parents to get their children (and maybe the parents) thinking about this as soon as possible. The feeling is that the government isn’t likely to fund larger amounts of the Canada Pension Plan (CPP) or other income supplements that people might like to have. Top that of, is the fact that there are fewer and fewer defined pension plans—those are the ones that allow people to worry less about saving for retirement.
When I look at my own family, our eldest daughter is starting her University education and someday will get married and start her own family. These life events will make it harder and harder as your income will be spread over more expenses. By developing savings habits today and as life events take place, it will be easier to adapt.
Many people look at their house as the key to their retirement plan. Keep in mind that people still need a place to live and these days fewer retirees wish to downsize. Housing prices are also a reason for retirees to stay in the family home as many areas that are sought after retirement communities such as Kelowna don’t come cheap.
A savings plan can help people diversify and gain flexibility. The family home is an excellent way to create personal net worth but if you’ve got everything tied into the equity in your home it starts to reduce your choices as you get closer to retirement.
One convenient way for young people to save for retirement is through a systematic withdrawal program, making monthly contributions-- No matter how much money you make now or in the future each dollar will help. The program can be as simple as contributing monthly to your employer’s defined contribution or Group RSP where there may be an employer matching program. You should start looking at these programs before looking at buying a home and putting strain on your pay check.
Another savings vehicle is a Registered Retirement Savings (RRSP) which provides a tax incentive for savings through tax sheltered growth and tax-deductibility. Typically, when you file your return, you will receive a tax refund at the end of the year. You can use these funds to make additional RSP contributions or use the refund as an extra payment against your mortgage.
You will hear people say that you should save ten percent of your income and pay yourself first. While I agree that you need to pay yourself first and the ten percent is a great starting point, it may not be the right percentage for everyone. Everyone’s circumstances are different so you need to make sure you are comfortable with the amount you put away as it could be more or less. They key thing is to put something into a saving plan each month and create the habits. I tell my daughter and our clients, you can increase the amount over time and as you get a raise so does your savings plans.
When we talk about diversification, an excellent way to achieve this is through Mutual Funds. They are a great way for an individual to start getting exposure to equities which over the longer term have provided a better return than buying investments such as Guaranteed Investment Certificates (GIC’s) or putting money in a savings account.