Rounding it up
Thinking about building a retirement nest egg? Before you commit to any specific strategy, cultivate a savings mindset.
By building your savings, you’ll be better equipped to deal with life’s unexpected events and pay off any interest-bearing debt.
Once you’ve cleared any debt, it ’s finally time to open a retirement savings account. Registered Retirement Savings Plans (RRSPs) are a popular and tax-efficient choice.
In Canada and western society as a whole, retirement is seen as the end goal of a productive working life. While the idea of the “perfect retirement” changes with each successive generation, one idea stays constant: saving money for when the time comes to retire.
Because so much emphasis is placed on the concept of retirement, there is a seemingly endless number of strategies to build a sufficient nest egg. The retirement planning process is further complicated by the many different types of retirement and savings accounts sanctioned by the government to help working citizens save.
If you, like many Canadians, wish the world of retirement planning were more straightforward, today is your lucky day. We’re diving into tips and tricks that can simplify your retirement savings process.
Cultivate a savings mindset
Saving for retirement is not too different from the practice of saving for your day-to-day. With the latter, we’re taught to stash away some rainy day funds to prepare for life’s curveballs. By saving, we create a cushion for the unexpected and improve our financial health.
With retirement, savings are even more critical because you will have to live exclusively on that cushion for decades. Fortunately, the government recognizes this importance and steps in with their retirement accounts. For example, you can open a Registered Retirement Savings Plan (RRSP) to both lower taxes and save for your unemployed years.
Ask the right questions
But before you open and put money into an RRSP account, ask yourself this very important question: When should I start putting money into a retirement account? Too often will people rush to retirement planning, focused only on reducing taxable income and not on their whole financial picture. This tendency is further fueled by financial institutions, accountants, and personal wealth advisors who urge clients to immediately put money into a retirement-focused account to “lower taxes.” We need to remember that this advice might be more for the financial gain of the institution and less for the benefit of the saver.
In reality, the right time to start saving for retirement is when — and only when — interest-bearing loans have been repaid. This goes against conventional financial wisdom, but as stated before, conventional financial experts tend to only look at the tax liabilities of individuals instead of the bigger financial picture. Resist the temptation by reminding yourself that in the end, you will pay taxes when taking the funds out during retirement. RRSP accounts are often sold as a way to avoid taxes, but in reality, they are just a deferral of taxes.
"In reality, the right time to start saving for retirement is when — and only when — interest-bearing loans have been repaid."
Think about it this way. If you have a car loan, credit card, or mortgage, you are paying interest every year on that loan. The average interest payments for a typical household are $8,000 a year. And that is just the interest paid for borrowing and does not include the principal payments. Currently, the interest paid in saving accounts or money markets is zero to negative. So, what is the point of saving for retirement when you have loans costing you 4% to 30% interest?
And sure, money placed in a retirement account could also be invested in stocks, bonds, or other financial instruments. However, all those investments come with risks of future losses. Markets are volatile and you run the risk of losing money that could have been used to pay off debt.
The best strategy is to find ways to save money in the present, earn some interest (with KOHO, you can earn up to 4.5% interest on your entire account!), and pay off loans until you’ve rid yourself of interest payments. This is the most robust and safest way to build a foundation towards a secure retirement.
Choose your retirement savings vehicle
If you have paid off interest-bearing debt and saved some excess cash, now’s the time to open a retirement savings account.
While there are many different types, RRSPs are the most popular thanks to their flexibility. You can open an RRSP with as little funds as you’d like; there is no minimum. They do, however, come with limits unique to each taxpayer. In 2021 the limit stands at $27,830 or 18% of a taxpayer’s before tax earnings. Plus, any interest or profits accrued from your RRSP balance will be considered tax-free until withdrawn.
Saving for retirement starts with saving right now
Saving for retirement seems complicated, but it’s in your control. After all, it’s the daily changes that get a person to reach a financial goal like retirement. For example, find ways to save on your commute, or increase income through a side hustle. Put that spare cash towards paying off any debt. Once you’ve repaid any and all debt, start building your retirement account funds with peace of mind.
Jordan T. Hedberg
Jordan is a former Broker and current community newspaper Publisher. When he is not researching and exploring the financial world he can be found raising grass-fed beef and goats in the Colorado Wilderness.