In this episode,
I will share 5 VERY important
Retirement Planning steps!
So make sure you stay until the end!
Hey Guys! It’s Thomas!
Your Trusted Advisor!
Whether you like it or not,
retirement is inevitable
and we are gonna get there
at some point in our lives.
But to be able to live a comfortable retirement life,
We NEED to plan ahead!
You don’t want to be planning for your fire escape route
when there’s a fire outside of your door,
so likewise, for retirement,
you don’t want to start planning for your retirement
just before you reach your retirement age.
It’s always better to have some sort of plans
than no plans at all,
and it’s never too early to start planning.
In today’s video,
I will be talking about the necessary steps
you need to take to plan for your retirement,
the vehicles you can use to help save for your retirement,
as well as some strategies you can utilize
to supplement your retirement income.
Let’s Dive in!
Like planning for anything,
you want to know what’s the end goal
you are trying to achieve.
When do you want to retire?
At 60? 65?
Or like many millennials’ dreams, 40?
By asking this first question,
it would allow you to have an idea of
the amount of time you have for saving.
Once you find out how much time
you have on hand for savings,
then you can start working on it
such as the amount you need to save per month,
and how aggressively you should try to save?
Another important question you need to ask yourself is,
what is your definition of retirement?
To one person, retirement means working reduced hours,
whereas to another person it means stop working entirely.
This is important because if retirement means
completely stop working for you,
then you better make sure you are on track
to saving up enough for you to do that.
As I always say, a goal without a plan is just a wish.
Keep in mind though,
having an answer to these questions
doesn’t mean they are set in stone,
they can certainly change if your situation changes
as you approach your retirement.
So what do you want to do in your retirement?
Comment below!
Now you might be wondering,
exactly how much do you need to save
to reach that retirement goal?
there’s no easy answer for this question.
Sure!
there are lots of formulas and online calculators
that will help you work out a figure.
And they do provide helpful guidelines,
but ultimately the person would have to calculate
the amount necessary for his retirement,
because only he would know
how much is enough for him.
The key here is that
this amount should be calculated taking inflation
and the future value of money into account.
Once you can figure out
the amount required for your retirement,
you can see clearly the monthly savings target
you would need to reach your retirement goal.
For instance, Sam, aged 25,
wants to retire at 65 which is 40 years from now.
He currently makes $2000 per month.
With inflation of 2.5% per year,
He needs to make $5400 in 2060 in order to
keep the same buying power as of today
In other words,
Sam needs to make sure
he has $5400 of income per month
from somewhere by the time he retires
If he wants to solely depend on his saving,
then he needs to save around
1.2 million for his retirement.
quick math here.
with a 5% return per year,
the 1.2 million will give Sam $60,000 a year
and that is $5000 per month.
Be careful here though,
there’s a lot of uncertainties here,
because you need to factor in
the extra medical costs you might need,
longer life expectancy,
or fluctuating inflation rate and cost of living
This is why it’s advisable to always
save more than what you think
you’ll need to take into account the unforeseeable.
Another thing that matters is the amount of expenses.
Some people live frugally,
while others might live lavishly;
people might be a homeowner,
or they have been renting all along;
some might have a car that they need to pay for,
whereas some only take public transit.
As a result,
everyone’s lifestyle and expenses can be very different.
Unless you expect to change your lifestyle
100% at your retirement,
chances are your expenses would be more
or less the same as your current lifestyle.
As you might have figured out by now,
it’s never too late to start saving for your retirement.
In fact,
We should save for retirement the moment
we start working.
By starting earlier,
not only we are able to save up less
each month to reach our retirement goal,
we can also take full advantage of compounding returns.
let’s look at an example here.
Mary starts saving for her retirement at 25.
She saves $3000 per year.
So that’s around $250 a month
If she invests this amount
with a 7% annual return since 25,
she would have over $600,000
by the time she retires at age 65.
Now Gary didn’t start doing the same until he’s 35.
He invests the same amount each month as Mary,
and by the time he retires at age 65
But with the same 7% annual return,
he would have just over $300,000 by the time he retires.
The end result here is that
Mary contributed only $30,000 more than Gary,
but she has double the amount that Gary has at age 65.
This is the power of the compounding effect.
Now that you understand
how to kick-start your retirement planning
and the importance of saving early,
the next ingredient to the recipe of retirement planning
is what saving vehicles that you’ll be using?
In Canada, there are two main vehicles that
Canadians can use for saving up their retirement funds
Registered Retirement Savings Plan
And Tax Free Saving Account
In a nutshell,
Not only contributing to RRSP can
lower your taxable income for that year,
if done properly
it would allow your retirement savings to grow
to a substantial amount tax-sheltered
But careful, RRSP is like a double edge sword,
it might hurt you if you been blindly
followed what other people do.
For more information,
I left a link below in the description box
and in the comment section
where you get to discover more
how RRSP can help or break your retirement.
So check it out please!
The other account that you can take advantage of
is the Tax Free Savings Account
Canadians can open up this account as soon as they turn 18.
Unlike the RRSP,
the contribution limit is not determined by income but by age,
so this account is a perfect place to keep your money
to avoid retirement benefit claw backs
The take home message though,
whether you decide to use either the RRSP
or the TFSA, or both,
don’t treat like a saving account and forget about it.
At the minimum,
you need to be investing in something
that would give you interest,
so that your money’s future value can beat the inflation.
Aside from these two main famous investment accounts,
you can get creative with other ways
to build up your retirement portfolio.
If your company offers you a pension plan,
then great,
make sure you start contributing as soon as possible;
it could really pay off at the time of your retirement.
But if you are like me,
a self-employed and a business owner,
it’s not the end of the world,
there are various ways that can help you save as well.
Most of you may already know,
real estate is a huge vehicle
that Canadians like to use to accumulate wealth.
In a survey done back in 2018,
it is estimated that 77%
of baby boomers across Canada are homeowners,
and the average net worth of homeowners
was $824,000,
7 times more than that of renters in 2012.
But as attractive as it seems,
you may be tempted to put everything in real estate,
that’s probably not the best idea.
The saying
“Never put all your eggs in one basket”
is always true.
When working on a good retirement plan,
it’s always a good idea to stay flexible and be creative.
For instance,
you might want to work past the age of 65 with part time hours.
You might be surprised
by how much difference a few years’ worth of contributions
make to your retirement fund.
Also, a lot of people tend to focus on making more income,
but it’s just as important to cut down your expense too.
When you have extra money sitting around,
Is it smarter to pay down the debts first?
or to contribute into your retirement savings?
The interest you save by paying down your debt
could mean a lot for your retirement.
As you age and get closer to your retirement though,
you might want to revisit your investment portfolio
and rebalance it according to your risk appetite.
The risk tolerance for a 25-year-old versus
a 50-year-old person can be drastically different.
So that’s pretty much the 5 steps
but I want to give out a bonus,
for homeowners out there,
you have one extra option beside renters,
and that is to do a reverse mortgage.
A reverse mortgage is a loan that allows you to get money
from your home equity without the need to sell your home,
and you can borrow up to 55% of your home’s current value.
In most of cases,
the bank allows you not to make any payments
until you sell your house or you pass away.
I don’t have an existing video that talks about
how a reverse mortgage works in greater detail,
but if this is something that you are interested
and you want me to do a video on it in the future,
leave a comment down below.
Now that we have powered through
the essence of retirement planning,
do you feel more confident about your retirement?
I understand that for most people,
managing money is a stressful thing to do,
but just think about it,
if you can put up with this little bit of stress right now,
you could very well live a stressful free retirement life!
Seems worth it doesn’t it?
No matter how small your progress is
believe me, any contribution is better than doing nothing.
So, start today, come up with a plan, and stick to your plan.
Thanks for taking your time watching this
and I will see you in the next video!