WHERE DID THE TIME GO?
It’s a commonly asked question. Maybe it occurs to you as you’re celebrating a significant milestone in life or in your career. Or perhaps it hits home when a survey asks your age and you find yourself ticking the next box down. Suddenly, you realize you’re in your 40s, and perhaps you don’t have the savings you’d like to have by this point in your life. Now, it’s time to take action and to figure out how to save money for retirement The key is to focus your efforts in three key areas: building a plan, repaying debt and maximizing savings. By tackling these areas, you can start making steady progress towards your goals, one manageable step at a time.
How to Save Money for Retirement
BUILDING A PLAN
Imagine you’re about to set off on a family trip to somewhere you’ve never been. You bundle everyone into the car, rev up the engine and head for the open road. But you don’t have a map and you haven’t packed anything at all: no food, no clothes, no money. You’ll likely be fine for the first few hours – but what then? Few would choose this kind of family adventure – yet, surprisingly, many people travel through life without a financial map or financial “supplies” like short-term and long-term savings to help them buy what they need along the way, and an emergency fund and insurance to protect them from the unexpected. In short, they haven’t created and implemented a financial plan. A financial plan identifies specific goals and the strategies to meet them. It’s a clearly marked path leading from where you are now to where you want to be. And it can help to answer the questions that keep many of us up at night:
What can I afford today?
When can I retire?
Will I run out of money?
Working with an advisor like me, you can build a written plan that works for you. Challenges may come along – an illness, a job loss, a divorce – but with a financial plan you’ll be in a better position to leap the hurdle and get back on course.Take charge of saving in your 4Os.
The ratio of household debt to disposable income in Canada reached a record 163.3 per cent in the last three months of 2014 – up from 66 per cent in 1980.2 A significant amount of this is mortgage debt – a recent survey found that Canadian homeowners with a mortgage are carrying an average outstanding balance of $190,000.3 A plan to repay debt is an essential component of your financial plan. Setting a schedule can help you eliminate all debt by the time you retire. That’s important because in retirement, on a fixed income, it can be more difficult to manage the extra expense of interest and of paying down debt. There’s also the risk that interest rates may rise in the future, adding to the cost of carrying debt.
To start tackling your debt, consider:
■ Working with your advisor to integrate debt management into your personalized financial plan
■ Consolidating loans into one account with a lower interest rate to reduce the cost of debt
■ Putting a specific monthly amount towards debt to make repayment a habit
■ Reducing unnecessary expenses and paying with cash to avoid adding to debt
■ If you have multiple debts, paying down those with the highest interest rate first Need extra motivation? As soon as you’re debt free and don’t have to make any more principal or interest payments, you will have more money available to add to your savings.
The financial planning industry often emphasizes the importance of starting to save when you’re young. Does that mean that at 40-something you should give up on saving for retirement? Of course not! In your 40s, you may have to work harder at building your savings but you still have time on your side. Start by crunching the numbers with your advisor. How to save money on retirement will start to get easy once you answer questions such as these:
■ How much have you saved so far?
■ How much income do you expect to receive in retirement from government and workplace pension plans?
■ How much income do you need to sustain your lifestyle throughout retirement?
Next, to help make saving a priority, set specific saving goals – as much as you can afford – and check in every year to see the progress you’ve made and to fine-tune your plan if necessary. It’s also critical to maintain a long-term perspective, since you may have 20 years or more of saving and investing ahead of you before you retire.
To help with that, here’s a refresher on some timeless principles of investing.
1. Always diversify
This year’s top performer isn’t likely to be next year’s. One of the most effective ways to reduce investment risk is to diversify – across asset classes (e.g., stocks and bonds), geographic regions (e.g., Canadian and international investments), and product solutions (e.g., mutual funds and guaranteed investments). Your advisor can help you select the strategy appropriate to your tolerance for risk.
2. Be rational, not emotional
In good times, investors are excited; they may want to invest more and often “buy high.” When markets turn negative, investors sometimes become fearful and decide to cut their losses; they “sell low.” Stay disciplined and committed to your long-term investment plan to avoid riding the emotional rollercoaster.
3. Stay invested
Jumping in and out of the market increases the chance that you will miss the days when investments perform best. By staying fully invested, you can help ensure that you capture those best days, which can add significantly to your long-term returns.
4. Focus on the long term
Markets move through cycles but, if you’re investing for the long term, longer-term trends are what count. Keeping that in mind, and measuring your performance over time rather than overnight, will help you stay the course through market crises and opportunities.
5. Turn market ups and downs to your advantage
Investing a fixed dollar amount every week or every month helps to keep you on track towards your saving goals. It also means that fixed dollar amount will buy more units when prices are low and fewer units when prices are high – a benefit that is often described as dollar-cost averaging.
OLDER AND WISER
You may not be fresh out of school and at the start of your career – but that’s an advantage both in life and in investing. As you move through your peak earning years, you have a tremendous opportunity to build your savings by creating and following a financial plan designed to meet your needs and achieve your dreams. Now, it’s time to get started. Meet with your advisor to discuss your personal situation. If you don’t have one, I am available to sit with you and analyze your needs. Together, we can design strategies to help eliminate debt and build savings through extra contributions and appropriate investment choices. With a comprehensive financial plan in place, and updated regularly, you can have confidence that your finances are heading in the right direction to achieve your goals for the future. This is turn will help you get answers you need on how to save money for retirement, the right way.