How to plan for your retirement

Start thinking about your retirement income

Canadians are living longer than ever before – up to 20 years more than just a few generations ago. All the more reason to start planning right now for how you'll live during your retirement years. Here are some essentials to get you started.

According to conventional wisdom, senior citizens like Neil Young and Bruce Springsteen should have hung up their guitars and started perfecting their shuffleboard technique years ago. But that's no longer the case – for rock stars or even regular folks.

Data from Statistics Canada shows that a 35 year-old man living today has a 25% chance of living past 85 and a 35 year-old woman has more than a 25% chance of living past 90. Not all of us over the age of 70 can fill an arena to hear a concert (with the income that provides), so it's crucial to get your retirement strategy on track as early as possible.

Start an RRSP

Registered Retirement Savings Plans (RRSPs) remain one of the best retirement investments available. Your annual contributions are tax deductible and dividends, capital gains, and interest are all tax sheltered. You only pay taxes when you withdraw the money – in theory, in retirement. And ideally, you’ll withdraw at a lower tax rate than during your peak earning years. If your employer has an RRSP program, be sure to participate.

Contribute early

Start as early as you possibly can. Even if it's not much at first, those contributions you make in your 20s – before mortgage payments and child expenses come along – can become a significant nest egg by the time you reach retirement. Even in years with heavy expenses, make sure you still contribute, even if only a modest amount.

Contribute monthly

Some people wait until the deadline (typically in late February up to the first day or so in March) to contribute, but tax-sheltered compound interest can make a dramatic difference, so make sure to contribute monthly. It's easy to have your contribution automatically transferred from your bank account every month.

Aside from the convenience, if you're investing in markets (mutual funds, stocks, bonds or ETFsᶲ), you'll benefit from dollar-cost averaging. This reduces the effects of market volatility. You buy fewer units when prices are high and more when prices are low.

Contribute the maximum

It's worth getting your maximum tax break by contributing your limit. You can contribute 18% of your earned income from the previous year up to a limit that increases annually. Your allowable amount will be listed on your previous year’s tax assessment. If you don't have any available cash, consider an RRSP loan – the interest cost will likely be more than outweighed by the compound growth over time. You can also carry forward any unused contribution room.

Invest for the long term

The key to building long-term wealth is to be a long-term investor. This requires patience and discipline. Don't let day-to-day market fluctuations distract you from your long-term objectives. Unless you're closing in on retirement, time is on your side.

Designate a beneficiary

Should die before retirement, your RRSP will go into your estate and be subject to probate and other fees. Designating a beneficiary avoids all that. If you name your spouse, your RRSP can be transferred into theirs tax-free. Talk to your financial advisor about all the implications when designating a beneficiary.

Diversify

By holding different types of investments, you can protect your RRSP against market fluctuations in any one category. Inflation can eat away at conservative investments, so consider diversifying into some growth-oriented securities. 

Create a spousal plan

The partner with the higher income can contribute to the lower income spouse's RRSP and still receive the tax deduction. The real benefit comes at retirement, when the money withdrawn will be taxed at the lower-income spouse's rate. This is an excellent way to income split and reduce your combined tax rate in retirement.

Consider a TFSA

TFSAs provide a tax shelter for income generated by investments, although there is no immediate tax deduction. But unlike RRSPs, you won't be taxed should you withdraw funds. The TFSA can provide a nice complement to RRSPs, providing a tax shelter if you've maxed out on your RRSP contribution.

Get expert advice

A solid retirement strategy is an integral and essential part of an overall financial plan. This is a key area to get professional advice from your financial advisor.