|Overcoming three common obstacles to a secure
Thursday November 20, 2014
Do you think you’ve saved enough for retirement? Do you think
you’ll ever retire? Research from such organizations as the
Conference Board of Canada shows that Canadians approaching
retirement are more worried than ever about their ability to
fund their golden years. I’ve identified three key areas where
the anxiety is the highest, and proposed some solutions.
1. Too much debt
Too many seniors are living beyond their means in ways previous
generations were not. Too many retirees have too much debt because
of dream homes, caring for their parents, and spending on adult
children who don’t leave home.
Watch for growing credit lines and live within your means,
even if it means buying a slightly used car and taking vacations
in the off-season, when kids are in school. Use debit, not credit.
The debt problem is especially dangerous because people are
generally predisposed to be optimistic. What happens when you
have debt and lose a job or have health issues that cause financial
difficulties? Your debt becomes something that could turn into
bankruptcy. That’s a time bomb waiting to go off. Diffuse it
now before “life” happens and you’re in real trouble. Interest
rates are very low and are expected to remain so, but think
what would happen if your rates went up 2 percentage points.
On a $400,000 mortgage or large credit line, that would make
a big difference.
2. Tied to the family home
Many Canadians have far too much of their net worth tied up
in real estate. If you can afford the million-dollar home and
still have assets and good retirement income, then you can stay
in the family home longer. On the other hand, if selling that
big home and downsizing to a townhouse or condo would simplify
your life or put $300,000 or more into your bank account to
live on, that could make a big difference in your retirement
lifestyle. You could do some of the things you thought you couldn’t
afford. It’s much easier to travel without worrying about the
grass to cut, snow to shovel, and the countless other issues
that come with home ownership. Renting is an option too.
3. Not saving
Start saving as soon as you start a full-time job. Usually
real estate is the first big purchase, because Canadians love
home ownership, plus it’s a great investment that is like a
forced savings plan. Then RRSPs, TFSAs, RESPs, and non-registered
investments can all be considered, depending on your income
and circumstances. That is for you and your financial advisor
to determine. But the sooner you start, the better, as you’ll
be using the power of compounding to your advantage. As a rule
of thumb, to start with, you should save about 10% of your total
Invest in assets that are likely to appreciate over the long
term, like your principal residence. For long-term retirement
savings, make maximum use of registered plans like RRSPs and
TFSAs for the tax-deferral benefits. And use non-registered
accounts for flexibility and to take advantage of the favorable
taxation of capital gains and dividends.
A flashy car that depreciates the moment you leave the car
lot and depreciates further each year isn’t an investment, and
it’s not much of an asset either. The same goes for all those
gadgets (the latest smartphones, tablets, gaming equipment,
and leading edge TVs, for example). If you are buying these
but telling yourself you have no money to invest in your future,
something is amiss.
Retirement planning isn’t about doing without and living like
a pauper. It is about balance, living within your means, and
not paying more income tax than necessary. It is about saving
consistently throughout your working life so you have the financial
means to retire when you want and do what you want in retirement.
It is also about protecting your wealth and family with adequate
life insurance and disability insurance. Bottom line: It’s all
about investing and protecting and minimizing income tax.
Generic Mutual Fund Disclaimer
Commissions, trailing commissions, management fees and expenses
all may be associated with mutual fund investments. Please read
the simplified prospectus before investing. Mutual funds are
not guaranteed and are not covered by the Canada Deposit Insurance
Corporation or by any other government deposit insurer. There
can be no assurances that the fund will be able to maintain
its net asset value per security at a constant amount or that
the full amount of your investment in the fund will be returned
to you. Fund values change frequently and past performance may
not be repeated.
Personal Opinions & Recommendations Disclaimer
The foregoing is for general information purposes only and
is the opinion of the writer. This information is not intended
to provide specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice. However,
please call the author to discuss your particular circumstances.