When it comes to retirement planning, your 40s loom large. Not only are you likely in the midst of your peak earning years, but retirement is no longer a distant dream.
The problem: you’ve probably still got a mortgage and you may well be saving toward post-secondary education for your kids. Even if you haven’t saved a penny yet, it’s not too late. You’re likely to have a good 25 years until retirement, so don’t panic and get with the program. Here’s how to make the most of what you’ve got.
Make sure you’re on track. This is a good time to think carefully about your retirement goals and whether you’re on track to reach them. Ask yourself how you visualize your golden years. 1 Do you aim to travel the world (you’re going to need extra cash) or putter away in the garden (your expenses might be lower than expected)? 2 If it looks as if there will be a gap between what you’ve saved (or can expect to earn in pensions) and what you need to achieve the retirement of your dreams, you might have to bump up your savings.
Reap tax savings. Since you’re probably earning a decent income at this point, it stands to reason that you’re paying a good chunk in taxes. If you’re living in Canada, you’ve basically got two tools at your fingertips to help you keep cash out of the government’s coffers and boost your retirement savings.
The first is a Registered Retirement Savings Plan (RRSP), which has two basic advantages: a) you typically get a tax deduction for the year in which you make a contribution and b) your investment earnings accumulate tax-free inside the RRSP until you withdraw the money during retirement. Your second option is to invest using a Tax-Free Savings Account (TFSA). Although you won’t get a tax deduction with a TFSA, all your earnings accumulate tax-free, even when you withdraw them in retirement. 3 That’s a big advantage. To determine which type of account to opt for, do some research on your RRSP and TFSA contribution limits and you’d be wise to consult a financial expert.
Make your RRSP contribution do double duty. It can be tempting to view your RRSP tax refund as “found money” and immediately blow it on a trip to Hawaii or a new sofa for the kids to destroy. Instead, get it working overtime by using it to pay off debt 4, invest in a TFSA or jumpstart next year’s RRSP contribution.
Get a raise? Give your savings a boost. We can all be prone to lifestyle inflation. You get the picture: your boss ups your salary and suddenly you’re eating out a couple of times a week. Or you see no reason your daughter shouldn’t attend that over-priced hockey school that just might help her fulfill her dream of becoming the first woman in the NHL.
I get it – nobody can live like a monk. So by all means reward yourself with some of life’s little treats when your income rises, but try to put the bulk of your extra income into savings. When you finally reach retirement age, you’re not likely to remember those extra dinners out. You’ll be eternally grateful to be able to do the things you’ve always wanted to do, without having to scrimp and save.
Balance risk and return in your investment portfolio. Fixed income investments such as Guaranteed Investment Certificates (GICs) and government bonds might be paying record low interest rates right now. If that’s the case, plonking your hard-earned savings into a GIC may actually cost you money over time as your return is eaten away by inflation. 5
In contrast, investing in penny stocks and other uber-risky investments in the hope of generating big money isn’t a good way to make up for lost investing time either. Holding a diversified portfolio of fixed income products and equities compiled with the assistance of a qualified financial advisor can help make it more likely you’ll earn a substantial return over time.6 And in the end; slow and steady usually wins the race.
Disclaimer: This article provides general information and may not be applicable to you. Please consult a retirement planning professional to discuss your personal circumstances. Foresters Financial and its representatives do not offer tax, legal or estate planning services.
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