- Dustin DeHaan
How Can I Save Money for Retirement?
Updated: Feb 21
Seventy percent of Canadians don't think they're saving enough for retirement. If you're worried about financing your golden years, start investing now. Reach out to an Edmonton financial advisor who can calculate how much you need to save, show you how to use tax-advantaged accounts, and help you avoid high fees.
How Can I Save More Money for Retirement?
Saving more money is about working smarter, not harder. Almost everyone can improve their tax strategy and accumulate more wealth. Start by taking advantage of your employer match and using all your tax-advantaged accounts. If you have money left over, invest it in taxable accounts or purchase a rental property.
Take Advantage of Your Employer Match
Many companies offer their workers a Group Registered Retirement Savings Plan. The money gets deducted from the employee's paycheque and placed into the account, so no taxes have to be paid on it. Some employers match a portion of their workers' contribution, often 3-5% of the salary. This is free money, so it's important to take advantage of it.
Use Your Tax-Free Allowances
The next step is to make use of your whole RRSP allowance. In 2023, everyone can contribute 18% of their income up to a maximum of $30,780. Using as much of your allowance as possible is sensible because you can deduct your RRSP savings from your taxes. When you invest your money, it grows tax-free until you withdraw it during your retirement. If you've maxed out your RRSP, consider contributing to a Tax-Free Savings Account. This is available to anyone over the age of 18 with a valid social insurance number. You contribute after-tax money to your TFSA, but any investment growth can be withdrawn tax-free. In 2023, the annual TFSA limit is $6,500.
What About Non-Traditional Workers?
People who are self-employed or run a business don't have an employer-sponsored retirement plan. However, sole traders can open a solo RRSP or TFSA. Small business owners, employees, and the self-employed can also use a Pooled Registered Pension Plan that comes with lower administration costs than a solo RRSP.
Work with an Edmonton Financial Advisor
If you're just starting, or you're worried about how you'll save enough money for retirement, reach out to a financial advisor. They will explain the accounts mentioned above in more detail and make sure you contribute to the right ones. They'll also discuss the most important investment concepts and help you select funds that are appropriate for your risk tolerance. Working with an experienced Edmonton financial advisor is particularly important for people with a high income who have money left over after all tax-advantaged accounts are maxed out. A finance professional can help high-net-worth individuals reduce their tax burden by investing their assets.
Saving Tips and Tricks
If you're struggling to put money aside, you're not alone. Studies have shown that up to 25% of the population doesn't have anything saved for retirement. Fortunately, it's never too late to get started. Although compounding is more effective when you're younger, it can still work in your favour if you're in your 40s or 50s. Some of the best ways of increasing your savings rate are paying yourself first, analyzing your expenses, and maximizing your income.
Have Money Deducted from Your Salary at the Start of the Month
It's much easier to save at the beginning of the month than at the end when you've already spent most of your salary. That's why financial professionals recommend that you "pay yourself first" by putting a pre-determined amount aside as soon as you receive your paycheque. Once you've locked your money away in a retirement account, it can't be accessed, so you won't be tempted to spend it. Try to save at least 10-15% of your paycheque.
Go Through Your Expenses
Reducing your expenses is crucial because it has a double benefit. When you spend less, you can put more money away for retirement. You'll also need to save less because your expenses are now lower. Go through your last three bank statements to determine if you have any subscriptions you no longer use. Call your energy, mortgage, and insurance providers and ask them whether a better deal is available. Once you've minimized your recurring expenses, check what you are spending your disposable income on. Are there any ways you could reduce your food or entertainment costs? Are there cheaper or free activities you enjoy? The idea isn't to restrict your lifestyle but to replace expensive habits with more frugal ones that are just as enjoyable.
Increase Your Income
Almost everyone can make an extra $1,000+ per year by selling things they no longer need, taking on a part-time job like tutoring or grocery delivery, or renting out some of their assets. Over time, these side jobs can expand and become an important income source. People with full-time jobs can also maximize their income by asking for a raise at their current workplace or switching to a better-paid position. Most financial experts recommend that any money from a raise is split 50/50. The first half is used to fund the person's retirement, and the second half can be spent.
How Much Do I Need to Save?
Financial advisors typically recommend that you save enough to cover 70% of your current income. While this formula works well for many people, it isn't suitable for everyone. If you expect your expenses to drop significantly after retirement, you might only need 50% or 60%. On the other hand, you'll need much more if you're planning on taking overseas trips, eating out more frequently, or picking up expensive new hobbies. Before setting a savings goal, determine how much money you'll spend every month once you're retired. Consider your housing costs, healthcare expenses, bills, costs related to food and drink, hobbies, activities, and vacations. Once you've come up with a number, determine how much you need to save each month to hit your target. Your financial advisor can help you to consider various factors like projected investment growth and tax deductions.
When Should I Start?
The sooner you start investing for retirement, the less money you need to put aside. This is because compounding speeds up wealth accumulation. If we assume that investments grow at a rate of 7% per year, someone who invests $500 per month from age 20 can accumulate almost $1,200,000 by age 60. A worker who doesn't start until age 45 needs to save almost $4,000 per month to achieve the same result. You might not think about investing when you're in your 20s or 30s because retirement seems far away. But as you can see, even small amounts add up over time. Start by putting away an extra $50 or $100 per month. This won't affect your lifestyle much, but it'll make a big difference in the long run. To secure your retirement, begin saving and investing now. Contribute to your RRSP, so you get your employer match. If you have money left over, max out your RRSP and contribute to a TFSA. Saving is easier if you have money deducted automatically from your salary, reduce your unnecessary expenses, and maximize your income. Reach out to us at DeHaan Private Wealth to speak to a reputable Edmonton financial advisor.