Okay, I know what you’re thinking: “I’m in my 30s. Retirement is decades away! Why should I worry now?”
Well, no one says you have to “worry”. Just take three simple steps now, and when you do retire, you’ll be glad you took action now.
First, let’s face an undisputable fact: everyone needs money in retirement. The colloquial definition of retirement is “I don’t want to work anymore and I don’t have to, either”. But, as the old adage goes, “no ticky, no laundry”.
Fortunately, there are three straightforward actions that will allow you to hit your “golden years” in good financial shape.
Save and Invest Early
This makes perfect sense. But the trick is actually doing it. Resist the sale at the mall or the last-minute getaway travel deal that you haven’t really saved for. This first step involves self-discipline. In many ways, saving and investing for retirement is not really a problem at all. The key to succeeding is to set an intention that will not waiver in the face of temptation. Financial advisors can demonstrate how monthly savings invested conservatively and allowed to appreciate on a tax-deferred basis (RRSP) or a tax-free basis (TFSA) will grow exponentially to the point where your eyes will pop out of your head in astonishment.
But none of that will happen if you allow your intention to weaken and you take “time off” saving for your future. Here’s something to remember: no one will look after you in retirement as well as you can. No one.
The best way to create a savings strategy is to set a monthly budget. Track your expenses big and small for a couple of months. Doing this exercise will show you clearly just where your money is going and how it’s slipping through the cracks. Seal the cracks and then pay yourself first, probably the most significant step you can take to wealth accumulation. Anywhere from 3-7 percent of your net monthly income should be set aside for your investment strategy. If you can afford more, great.
Do this consistently and reap the rewards!
Take care of your health
What on earth could good health have to do with retiring in comfort – other than allow you to spend your retirement wealth? Plenty. Actuaries – the folks at insurance companies who figure out how long we’ll live– have noted an interesting fact of life: we’re all living longer. Unfortunately, we don’t always live longer in good health. When we are retired and unhealthy, our health care costs rise quickly. Forget the idea that your government health plan will take care of all your expenses. It won’t. Health plans, whether they’re government-run, group medical and dental plans through your employer or personal health plans you buy individually, are all covering less and charging more.
If you encounter a health problem when you’re on a fixed income and you have to hit that RRSP for an emergency lump-sum withdrawal to pay medical expenses, you have shortened the life of that RRSP dramatically. Having a tax-free savings account (TFSA) for contingencies like this will help but you can certainly put the odds in your favour by simply living a healthy lifestyle. Makes perfect sense, right?
Sometimes, though, the dice don’t roll your way and you get seriously ill no matter how healthy you’ve been. Fortunately, there’s another way to avoid going to the retirement account. Critical illness insurance. This is a product sold by insurance companies that will provide a tax free, lump sum of money if you suffer any one of nearly two dozen serious illnesses (and some injuries) during your lifetime. You can use this money to offset out of pocket medical expenses.
I have a client in his mid-30s who ran a home renovation business. He owned critical illness insurance that I had provided to him. When he was diagnosed with a brain tumour, he had to lay off his employees and shutter his business. He also had to take a simply chemotherapy pill once a day at home. Because he took the medication outside a hospital setting, his provincial plan didn’t cover the cost: $4,000 a month!! When I handed him a cheque for $50,000 tax free, he was a very happy camper. His RRSP was intact and he didn’t have to re-finance his home.
Live within your means
So you have followed the first two steps above and done what you reasonably could to save and invest wisely for retirement. Now that you are retired, are you free to start spending like the proverbial drunken sailor? No, of course not. Your money has to last because the odds are that you will last a lot longer that you may think. When I do retirement planning for my clients, I assume they will live to the age of 90 and I base my calculations on that. You should, too. So that will require that you continue to have a budget in retirement. But this budget can allow for some fun; after all, you’re retired! Just so long as you factor the fun into the budget. Then you simply live within the confines of your budget.
There’s no rocket science behind saving for retirement. Just planning. But if you fail to plan, then you’re planning to fail.