02/26/2014 12:20 EST | Updated 04/28/2014 05:59 EDT

How to Painlessly Save For Retirement

I just came back from yoga. I feel relaxed, zen like.

After I got back I was doing some online banking and had a look at my RRSP. So much for the yoga, now I just feel overwhelmed. I have calculated that my wife and I need $850,000 to fund our retirement. Suffice to say we aren't even close. Like many working couples we have a mortgage, car payment, daycare payment and what feels like a million other expenses. Who has anything left over at the end of the month to sock away for retirement?

Everybody has different plans for retirement; some will be more expensive than others. A generation ago, people retired at age 65, the average lifespan was 72, and all you had to do was plan for 7 years of retirement. Not so hard. These days people want to retire early at 55 or 60, and people are living well in to their 80's. Instead of saving for a 7 year retirement, we are looking at 25 years, which means we need to save a lot more than our parents did.

In my 20 years working in the financial services industry, I have never heard someone say the less money you have at retirement the better. Some people can and will certainly make do with less, but one thing is sure; the more money you have saved when you retire, the more choices you will have in retirement. Follow these steps to start the ball rolling:

1) Get a written financial plan. How are you supposed to start saving for retirement if you don't know how much to save? A financial plan will help you assess how much to put away, what rate of return you will need, where to invest (RRSP or TFSA, more on that later) and most importantly, how much you will have at retirement.

2) Start saving early. There is an old adage in the financial industry that time + money = more money. It's a lot easier to save $850,000 when you have 30 + years to save than 10. The earlier you start, the more money you can put away and the more you allow the magic of compounding (see next step) to start working for you.

3) Invest wisely based on your risk tolerance. This sounds easy, but it takes patience and discipline. Money doubles by a factor of 72. This means that if you only earn 1 per cent it would take 72 years for your money to double while if you earn 6 per cent it only takes 12 years. The longer your time horizon, the less volatility will impact your portfolio. The "noise" in the market today is going to have very little effect on your portfolio 20 years from now. A well-diversified portfolio should earn 6 per cent over the long term. Even the most skittish investors shouldn't avoid buying equities when they have a 20+ year time horizon.

Tax Free Saving Accounts (TFSAs) or Registered Retirement Savings Plans (RRSPs)? Which should I be putting my savings in? It all depends on your individual situation. If you are in a higher tax bracket and could use a deduction on your taxes the RRSP is an obvious choice, since every dollar you contribute (up to the yearly maximum) is tax deductible. It's what most Canadians use to save for retirement.

The TFSA is the greatest vehicle for saving for retirement since the introduction of the RRSP nearly 50 years ago. Remember, just because it's called a "savings" account, doesn't mean you only can hold cash in it. You can invest in the same securities as you would in your RRSP. If you put away the maximum $5500 every year and earn 5 per cent each year, after 40 years you would have nearly $750,000 for retirement. And unlike the RRSP that money is not taxable. Problem solved.

Now if I could only master the Eagle pose.


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