Some people greet the topic of retirement planning with the same enthusiasm as dental appointments. It doesn’t have to be like that. The good news is that investing for your future does not have to be painful or complicated at all. Once you invest the relatively small amount of time to start crafting your retirement nest egg, the end results are always worth it.
Let’s begin with a review of some simple, yet amazingly effective, strategies you can adopt to reach your retirement goals. Such as:
Reduce high-cost debt
Stashing away cash for retirement investments is a good idea — but first, it’s important to tackle any high-cost debt (with the exception of your mortgage) that you carry. On credit card balances, you may be paying in the neighborhood of 20 per cent interest. If your investments are earning just 8 per cent, for example, you are losing money and not moving ahead financially. Address high debt before you invest.
Maximize your RRSP
The Registered Retirement Savings Plan (RRSP) is an essential source of retirement income. Regardless of age, every Canadian of working age should start one. It allows you (until the age of 71) to put 18 per cent of your earned income from the previous year into a tax-sheltered fund. For 2014, the maximum annual amount allowed is $24,270 and $24,930 in 2015. While long-term growth is the main goal, you’ll reap tax savings each year you contribute.
Protect your savings
In the 1980s, Government of Canada savings bonds earned between 10 and 15 per cent interest. These days, it’s just 2 per cent — barely enough to keep up with the rate of inflation. That means you need to get better returns on your savings. Instead of government-issued bonds as a low-risk investment option, consider GICs (guaranteed investment certificates) or corporate bonds for healthier earnings. Shop around at various financial institutions for the best rate.
Sell your house
For many Canadians, their homes are the biggest asset they own and, thankfully due to a strong real estate market, it’s one that has grown in value in recent years. You can add to your retirement funds by selling it, and downsizing or relocating to reduce your living costs.
Cut your taxes
RRSPs are not the only way to shelter your retirement funds from tax. Now, anyone over the age of 18 can open a Tax-Free Savings Account (TFSA) with their bank. The current annual limit is $5,500. Investment income earned from a TFSA is tax-free. Contributions are not tax-deductible, so if your first goal is to cut taxes it may be best to build up retirement funds by making the maximum contribution to your RRSP first.
Work longer
You don’t have to give up your career once you hit retirement age. You can continue to work on contract, start your own business, or serve as a consultant. Or find a part-time job that allows you to augment the income you will receive from the government and any corporate pension plans.
Reap dividends
A balanced investment portfolio should include some stocks. Choose companies that pay out dividends to shareholders, usually quarterly or annually. Use that money to pay for day-to-day living expenses; or during the countdown to retirement, reinvest that money and purchase additional shares for greater earning potential. Ask your investment advisor for recommendations.