If you’re looking to start your retirement planning early, getting into the habits of saving are imperative according to one local financial planner.
Rob Georgeson is a Certified Financial Planner with IG Wealth Management. He says that the mechanisms available for saving in Canada have different benefits.
“When I have a younger person who’s just starting out who hasn’t had a home or anything else now we use the First Home Savings Account (FHSA), they’re not available at all financial institutions but normally we’d use RRSPs (Registered Retirement Savings Plans) as savings for a house as long as you haven’t owned a home in the last four years you can borrow from your RRSP. You can also borrow from your RRSP for going back to school as well. So it does give you the opportunity to save for retirement and just in case you want to use it for your home purchase or anything else.”
When you want to get started with saving for the future Georgeson says it’s all about the budget.
“Starting off with a small amount actually helps and then just trying to increase it,” he said. “I use the term ‘magic number’ for bank accounts. Some people like $1,000 in their account, if it goes down below that number they won’t spend on frivolous things, so if it’s sitting at $1,500 they’ll say ‘hey I’m gonna go buy that right now.’ Every person has their own set number for budgeting purposes even if it’s just the mentality.”
The financial planner says he’s used a similar mentality throughout his own career.
“When I first started my career–I was fortunate enough to grow up with parents that were self-employed–so every time I got a raise, let’s say I got a $100 raise, I actually increased my savings by 80 per cent of that raise. So if I made $100 more, I already had my budget set so I put $80 more towards my savings and then that extra $20 I’d pocket it, spent on myself or do something a little more with my lifestyle, but I always tried to keep my lifestyle similar and not exceed what I was comfortable with. It’s when you’re trying to chase the Joneses that you kinda get yourself into problems.”
When it comes to saving he says it’s best to start small to build up to having that right number in your accounts.
“If you start too big with savings, it gets discouraging because now often you can’t afford something else or you find it too tight,” Georgeson said. “Then you start getting a negative effect. Yes, you are saving more but we basically encourage people to kind of save and forget.”
This means choosing a number to have automatically deducted for savings that won’t necessarily affect your day to day living.
As part of a compensation package, some employers will match RRSP contributions so if the employee puts a certain amount of their paycheque into an RRSP the employer will match the amount up to a certain percentage of their pay. Georgeson used an example of one local employer to discuss this.
“I’ll pick on New Gold, New Gold matches up to seven per cent, that’s seven per cent of your pay if you’re maxing out there’s seven per cent of of your pay that’s going into your RRSP that you didn’t have to spend out of your own pocket, so you basically get a 100 per cent return almost instantly. I’m huge on RRSP matching for employers, I encourage all of my clients to max out on those because it’s free money.”
How much someone needs to save for retirement depends on the kind of lifestyle they want to have after they stop working.
“At one time it was ‘I have to have half a million dollars before I retire,’ that was a common thing,” Georgeson said. “The correct answer is what kind of lifestyle do you want when you retire? Myself, for example, we have gardens we spend so much time at home in the backyard, our retirement’s going to be pretty simple we don’t go on vacation or anything but if a person wanted to go on a larger $10,000 trip each year they’re going to have to have more saved, the Canada Pension Plan and Old Age Security wouldn’t cut it in those aspects.”
Budget before retirement, and therefore saving ability, will also be dictated by lifestyle.
“What I can say for people starting out, is don’t buy things you can’t afford,” he said. “Just because a payment on a vehicle loan can be over eight years, are you planning to keep that vehicle over eight years? For most people it’s no. Then you’re potentially stuck with that loan and a new vehicle loan.”
Often in a time where credit can be easy to access Georgeson says people out borrow their budget.
“That’s where we find a lot of issues with people nowadays,” he said. “With easy access to financing, people don’t want to save because they can just borrow to get more. They see borrowing as very easy then all of a sudden their budget goes to nothing.”
People have a hard time thinking about the future, Georgeson says.
“People say, unfortunately, ‘what does it get me today versus later.’ It’s up to financial (people) as well as everyone else to try to educate people that you want to retire at some time,” he said. “And there will be more expenses… So are you planning for that? Because all of a sudden your pension is never going to be as much as what you make for income. It’d be nice if it was but it’s not, that’s not how life works.”
Forming habits and knowing you need to keep away from your savings are the biggest points to take away whether you’re doing it in an RRSP or TFSA, Georgeson says.
The main thing, honestly for RRSP or Tax Free, is saving and getting in the habit of saving even if you start small and increase ever so slightly,” He said. “You will be better off in the long run. Because you’ll get used to that savings. It won’t be something that hurts you. The other thing is to always maintain the mentality that this is an account I shouldn’t touch because as soon as you touch it all your hard work goes away.”
