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Saving for retirement

Practically everyone who works dreams of the day when they can stop working. And according to Statistics Canada, that day is approaching faster than it used to: according to the latest census information available, 34 per cent of Canadians retire before the age of 60. So, instead of just dreaming about retirement, why not start actively planning?

The first step is figuring out how much income you'll need in retirement. If you've taken the time to create a budget, you should already have a pretty good idea of how much you're currently spending. The general rule is that you'll need 60 to 80 per cent of your current income to maintain your current standard of living when you're retired.

The next question is obvious. Where will you find that much money? There are a number of possible sources of post-retirement income and you should take each of them into account when developing your strategy:

1. Employer-sponsored retirement plans: These include company pension plans and deferred profit sharing plans.

2. Government pensions: These include the Canada Pension Plan/Quebec Pension Plan and Old Age Security.

3. Your own investments: In most cases, the first two sources of income won't be enough to cover all your expenses. That's why it's important to develop a strategy where you're saving and investing for your future needs.

Setting up a Registered Retirement Savings Plan (RRSP) is the most popular way to save for retirement. When you make a contribution to your RRSP, you not only get a tax deduction for that amount, but your investment grows on a tax-deferred basis until funds are withdrawn. That means you don't have to pay tax on any interest, capital gains, or dividends you earn until you actually take the money out of your RRSP. Many different types of investments are RRSP-eligible. Some include stocks, bonds, mutual funds, Guaranteed Investment Certificates (GICs), and Treasury Bills.

To make the most of your RRSP, keep the following tips in mind:

Start early. When you contribute to an RRSP sooner, your money has greater potential to grow. Depending on the investments you choose, you can reap the benefits of compound interest — where you make money on the money you've already earned!
Contribute regularly. Make arrangements to have an amount transferred to your RRSP every month — it's an easy way to make your money grow.
Maximize your contribution. It usually makes good financial sense to maximize your RRSP contribution every year. If you decide to take out a loan to do so, consider using your tax refund to start paying it off right away. Talk to your tax or financial advisor about this option, or other ways to save for your retirement.

Saving for retirement

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