Tuesday, July 25, 2017
How to Start Saving For Retirement
Good morning friends and welcome back to the Tip of the Week. This week is all about retirement saving here at Budget Boss. Yesterday I spoke about the importance of saving for retirement. Now that we have why you should save for the future out of the way, today I will show you some methods on how you can do it. With a website name like Budget Boss, of course, my focus has mainly been about cash flow and budgeting. The reason for this is because knowing where your money is going will allow you to direct it in the proper places. One of the most important places is retirement savings. There are many different vehicles you can put your hard earned money in to save for your retirement. In this post, I will go over a few of them and show how they can help make your money grow. There are many ways to get started but the first step is saving a portion of your monthly income specifically for retirement. Once you have begun to do that focus on the following areas to direct that money.
1) Tax-Free Savings Account (TFSA)
Many people do not know the power of the TFSA. I have said it before and I will say it again: “The TFSA will be the retirement vehicle of the future!” The reason behind it is the name itself, Tax-Free! Even with yearly contributions limited at $5,500 you can still put together a healthy nest egg with your TFSA. Don’t believe me, check this out:
Saving $5,500 per year, TFSA, earning 8% interest, till age 65
Starting at Savings at retirement Taxes Saved
Age 25: $1,480,217.86 $714,751.29
Age 35: $647,286.67 $259,848.21
Age 45: $261,478.37 $71,193.43
That is a lot of money! It also shows the importance of starting early. The TFSA is a super powerful tool in your retirement tool belt. While it’s original intention was for short-term savings, and it still can be used for that, I believe its capabilities as a retirement savings vehicle are unmatched. While saving the maximum $5,500 a year might seem tough, I bet I can find the same amount wasted yearly on nonsense. Besides, getting started means just that, get started. Once you get accustomed to saving it is then your Financial Advisors job to get you to save more, like a personal trainer for your wallet.
Freedom 55? Is that even possible? – Budget Boss
2) Registered Retirement Savings Plan (RRSP)
The RRSP was Canada’s solution to self-employed individuals needing retirement savings. This was when most organizations had group sponsored retirement savings plans. As those plans have become less and less common the RRSP has become more and more important. The RRSP is a dual-pronged approach to retirement savings. Like the TFSA, it allows you money to grow tax-free with it is in the account. Also, like the TFSA you have a maximum yearly contribution limit (18% of your earned income up to $26,010). Unlike the TFSA you get a tax deduction from any amount you put into your RRSP yearly. This means that any dollar you put into your RRSP is deducted from that years earned income, bringing down your taxable earnings. Also unlike the TFSA, money withdrawn from the RRSP is taxed at your marginal tax rate at the time of withdrawal. This makes tax efficiency planning crucial when it comes to your retirement income. Here is an example to show the power of the RRSP:
A person making $50,000 annually contributing the maximum to their RRSP:
30 years of contributions (Age 35-65)
Annual Amount Saved in RRSP: $9,000
Taxes saved due to RRSP contribution: $2,348
Amount Saved at Retirement: $1,077,374.68
Total Tax Deductions: $70,440
This person actually dropped their marginal tax rate from 29.65% all the way to 20.05% and saved over two thousand dollars in the process! The RRSP is an excellent tool for those looking to save for their future as well as save tax money in the present.
5 Ways to Maximize Your RRSP – Budget Boss
3) Insurance
I have mentioned many times that insurance is a valuable and vital part of any financial plan. What most people don’t know is that insurance can be part of retirement savings plans as well. Whole Life Insurance has an investment component to it that allows your money to grow guaranteed. These policies chug along and don’t experience the fluctuations that the stock market does. You can also incorporate Critical Illness Insurance into your retirement savings plan. Adding a return of premium rider to your policy will mean that if unused you get all your premiums back. While these products should not be the sole means of retirement savings, they can and should be part of an overall diversified retirement portfolio. Like the RRSP they are dual pronged as well. They are insurance, which means they provide for you should the worst happen. They are also guaranteed products that house your money to be used later in life. A well rounded financial plan will include some form of these products.
Life Insurance As an Asset Class – Wealth Management
These are just a few ways to begin saving for your retirement. If you already are doing so, it might be time to see if you are on track. The key is to be saving, the rest will fall into place. Having a dynamic, comprehensive plan that includes all these products is ideal, but getting started might mean delaying a few. Starting saving with the TFSA and insurance is great. Once your income levels increase, incorporating the RRSP into the plan becomes very valuable for it tax advantages. Doing all this, while not accumulating debt and paying down a mortgage will make your net worth skyrocket. It would not be unreasonable to see people with modest incomes retire with a net worth of a few million. The key is to get started and get the right advice.
“Money isn’t everything, but it is when you start thinking about putting money away for your retirement days.” – Andre Leon Talley
Email – joe@budgetboss.ca
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