Financial Friday 175: What to do if you are behind on your retirement planning?

You don’t have to look very hard to find news about the poor state of retirement preparedness many Canadians are feeling. An April 2023 survey by H&R Block revealed that nearly half of Canadians are unprepared for retirement, lack enough savings, and are planning on working part-time in their retirement years to make ends meet.

Unfortunately, many of us are behind on our retirement savings and we don’t need a survey to remind us. With the rising cost of food, gas, and other necessities combined with drastically higher interest rates on mortgages, we already know there isn’t much left to put toward retirement savings at the end of the month. If you are one of the 50% of Canadians who believe they are behind schedule with retirement planning.... don't panic! While starting early is ideal, there are steps you can take to catch up and improve your retirement outlook regardless of where you are right now.

Where do I start with my retirement plan?
Start by evaluating your current situation, including your savings, investments, debts, expenses.... even your income tax bracket! Understanding where you are now is the first step toward making a realistic, achievable plan. Increasing savings is where most people focus, but it is just one consideration.

For example, do you invest your savings in a TFSA or RRSP and take the time to analyze your annual returns and the fees you pay on those investments? Do you adjust your investment asset allocation and risk based on your current life situation? If you are 35 years old, the type of investments you hold and the associated level of risk is a lot different than someone who is 62 and expecting to retire in 3 years.

Debt is another key consideration. House prices have risen dramatically over the past 10 years and it is getting increasingly difficult to burn the mortgage before retirement. If you have tapped into your equity with a line of credit, what is your plan for eliminating that debt? If you are carrying debt into retirement, make sure you will have the income to service that debt. For example, if the kids are out of the basement, you could look into the viability of creating a basement suite to help fund the mortgage.

How much money do you need to retire?
All of us have retirement dreams (or at least expectations) and it’s time to start assigning some costs. Some major expenses like your home or the kid’s education may be paid, but there are still lots of other things to eat up your income. Are you planning to travel more? Are you staying in your current home or downsizing? Do you need a new car?
The average over 65 household spent $50,000 annually in 2019 and things are a lot more expensive now. However, retirement spending varies wildly between households and rather than look to others for comparison, you should sit down and start figuring out a budget based on YOUR retirement expenses and income.

When should you start saving for retirement?
Anyone who is asking this question needs a quick lesson in the power of compound interest. Contributing $500 to your RRSP every month from age 25 to 65 with a 5% return would yield $725,000 while starting at age 40 would leave you with only $287,000. Sure, you would have contributed a lot more money ($90,000) but the difference at age 65 is shocking! The answer to when you should start saving something for retirement is today!

The second key point about compound interest is that small differences in your rate of return can really add up over the years. If you increased the rate of return in our above example from 5% to 7%, your nest egg would be $1.2 million instead of $725,000! Any retirement financial advisor will tell you that piling up cash in a savings account is not the best way to grow your money. You should consider a mix of investments based on your risk tolerance, timeline to retirement, and financial objectives.

Having no retirement plan is planning to fail, and the consequences could be dire. You can take the time to educate yourself and manage your own retirement plan or click here learn more about the expert guidance and education available in our financial coaching program.
 

Resources:

How do you get along with money?
Financial knowledge will help you effectively manage your money and go a long way toward building a secure financial future, but your behaviour and mindset also have to be in sync to really be successful.

6 times when a GIC is a smart investment choice
With annual interest rates currently as high as 6% and no risk, does it make sense to load up on Guaranteed Investment Certificates (GICs) and put your financial market worries to bed?

Average stock market return over the past 10 years
Did you just read the above article about GICs and think they are the best thing since sliced bread? We don't give investment advice (just information), but this article makes a great case (using the S&P500 as an example) for keeping some of your wealth invested in stocks, especially over the long term.

Ouch! Variable-rate mortgages cost Canadians big money
In July of 2021 you could have chosen between a variable rate mortgage at 1.25% or a 5-year fixed rate of 2%. We all know what we would do if we had that choice today, but just how much more have variable rate mortgages cost over the last two years?

New investors: 3 Tips to boost your retirement nest egg
More information and compelling data to reinforce what we said above: start saving as early as possible, use TFSAs and RRSPs, and regularly monitor/optimize your investment risk and return.