3 reasons to save for retirement
When you’re juggling a mortgage, car payments, childcare expenses, not to mention student loans, it can be hard to even think about putting more money aside for retirement. Here are a few reasons you should.
An article published by Money Sense tells us that 60% of Canadians are saving for their retirement. This number drops to 52% in people aged 25-34.
The early thirties is a challenging period financially with the purchase of a new home, paying back student loans, a growing family… not to mention a career that isn’t quite in full swing yet.
Nonetheless, there are many advantages to start saving early.
How much will you need when you retire?
Before deciding on a savings plan, you have to figure out what your sources of income will be:
Experts estimate that you will need 70% of your gross annual income to be able to maintain your lifestyle at retirement.
This 70% includes your expenses, which should be less at retirement than while working.
If you have big projects, then consider saving even more.
To calculate the amount that you will need at retirement, use the Canadian Retirement Income Calculator.
Planning your retirement starts now!
In the fable, are you more grasshopper than ant?
Check out the advantages to contributing immediately to your retirement savings plan.
1. Time is money!
The savings you set aside today will make you save big in the long term.
Too good to be true? Let’s let the numbers do the talking…
Between 22 and 35, Lewis sets $2,000 aside per year. He then stops contributing to this retirement plan altogether.
Annie, on the other hand, starts saving $2,000 per year at 35 until she turns 65.
Lewis invested $26,000 ($2,000 over 13 years) and Annie invested $60,000 ($2,000 over 30 years).
Who will have saved up more money at age 67? Lewis! If we suppose an average annual interest rate of 5% up age 67, Lewis will have accrued $177,243, whereas Annie will only have $153,823.
The secret lies in compound interest. The interest will be reinvested and grow at the same rate as your capital.
2. Who can see into the future?
Many of us would love to have a crystal ball to help us plan for our old age… which for now is far off and somewhat unreal.
Unfortunately, no one can foresee their health, their financial needs, or how long they will live after they retire.
Add to these external factors a dramatic fall in interest rates or an extreme hike in the cost of living and, suddenly, the decision to retire doesn’t seem so final.
So, save when you’re young, even if the amount seems negligible. That way, you’ll have more leeway when you’re older.
If you start saving late and life throws you a curveball, it may be too late to implement a plan B.
Experts agree that, on average, the Old Age Security and Canada Pension Plan (or QPP in Quebec) are not enough to guarantee a decent retirement and enable you to maintain your current lifestyle.
This could also apply to your group retirement plan at work. With people living longer, there is pressure on group plans to do more with less.
A defined contribution pension plan offers no income guarantees at retirement. As for defined benefit pension plans, there’s nothing to stop the amount of contributions from being considerably increased to maintain the amount you will receive at retirement.
Relying only on government assistance or a group retirement plan exposes you to financial concerns.
Personal savings is the best path to a satisfactory retirement.
Prepare a plan with your advisor
Planning for retirement should not be left to the last minute.
Talk to your advisor about your needs, sources of income, typical retirement expenses, etc.
Your advisor will recommend the best saving strategy and help you hang up your skates one day.
Note: This blog post is provided for information purposes only. It is not a substitute for professional legal, financial or fiscal advice. For advice specific to your personal situation, always speak with your advisor. SSQ cannot be held responsible for any decision made as a result of reading this blog post.