Saving for retirement can be daunting, especially when you’re young and retirement seems a long way away. But getting started doesn’t need to be difficult or complicated – it just requires a little planning and a steady commitment. Follow these simple tips to get started today.
- Define your retirement goals
Take a moment to picture your life in retirement. Do you want to travel more, pay off your mortgage or move to a different location? How much money you’ll need in retirement depends on your long-term financial goals, retirement age and the lifestyle you want to live when you retire.
Most experts say you’ll need about 70%- 80% of your pre-retirement income to retire comfortably, although you may need to adjust this number up or down, depending on your plans. Predicting future inflation rates is also difficult, so it’s better to be extra cautious in planning for your retirement expenses. If you plan on travelling extensively during retirement or you want to retire early, you’re likely to need to save more.
Setting specific and realistic goals will help make saving for retirement more concrete; you’ll be more likely to stick to a savings program this way. Once you’ve identified your retirement goals –and how long you have to fund them – you can start taking steps towards achieving them.
- Save early and regularly
The key to saving enough for retirement is to start saving as soon as you can. Generally speaking, the sooner you start – and the higher your savings rate – the fewer working years you’ll need until you hit your retirement financial goals due to the power of compounding.
Compounded growth is the interest you earn on the principal you invest or save – and on the interest or gains each year thereafter. In essence, you’re earning interest on your interest. And over time, that can add up to a large amount, especially if you invest it.
Let’s say you saved $100/month for 20 years with an average growth rate of 6%. After 20 years, you’d have $46,535, with almost half of that due to compounding alone. That’s the power of time – and why starting early and investing regularly really makes a difference.
The most important thing is simply to start putting money aside every month. Even if it is just a small amount, contribute regularly and you’ll be on the right track. Make it easier by putting your savings on autopilot with an automated savings plan through your employer or financial institution. Setting up a pre-authorized contribution plan (PAC) to a registered savings plan like an RRSP or a tax-free savings account (TFSA) is another option you can use. By paying yourself first and being consistent, you’ll establish a habit which will make it much more likely you’ll be able to stick to your plan over the long term.
- Invest your money
Now that you’ve begun saving, you’re ready to take the next step – investing. In order to keep ahead of inflation and rising prices plus get the maximum benefit from compounded growth, you’ll need to invest your money where it can earn a much higher interest rate than a traditional savings account.
For example, if your goal is to save $1 million for retirement 25 years from now, investments with higher long-term return potential like common stocks may be appropriate. The closer you are to retirement, the more likely you’ll want a focus on capital preservation and assets that are more likely to remain stable in value, such as GICs or bonds.
The best thing you can do is build a diversified portfolio which has a blend of more stable fixed income investments such as bonds, along with equities or common stocks, which have higher risk but also higher return potential. The right mix depends on your investment objectives, time horizon and risk tolerance.
CMI MIC Funds are an investment option that can form part of a diversified investment portfolio. With a focus on capital preservation and cash flow, they can be a preferred fixed-income option for people who want an investment that has a strong focus on capital protection with a higher yield potential.
Begin by investing within a registered plan, such as an RRSP or TFSA. All investment earnings within both plans grow tax-free. RRSPs have the added benefit of tax deductible contributions. You can hold just about any type of investment in an RRSP or TFSA, making them an ideal investment vehicle to maximize first.
- Speak to an investment professional
Managing your investments can be overwhelming and you may not feel comfortable investing on your own. That’s why it’s important to speak with an accredited, registered financial and investment professional who has the knowledge and skills necessary to help you build a comprehensive financial plan. Plus, having a plan can help eliminate stress and anxiety by giving you a road map to follow and allowing you to track your progress.
Speak to friends and family to obtain recommendations or ask at any financial institution. Plan on interviewing a few different advisors to find one that you feel comfortable with – and one that truly understands your investment and retirement objectives and can assist you with reaching them.
Saving for retirement isn’t difficult – but it does require commitment and discipline. The earlier you’re able to start saving for retirement the better off you’ll be in the long run. But don’t worry if you haven’t started yet – there’s still time, no matter what age you are.
Speak to a CMI Investment Professional to learn about our MIC investment options.