Pattie Lovett-Reid: Is there a retirement crisis looming in Canada?
For those struggling to save for retirement, the stress is real. They hear the warnings and when faced with so many financial obstacles in their lives – from both personal and mortgage debts, to funding a child’s education and saving for retirement – it can be overwhelming.
Many people see retirement as something on the distant horizon and it doesn’t take top billing in their financial hierarchy for now.
But should it be?
ASSESS YOUR GOALS
Begin by asking yourself: What financial goals are most important to you? What are your short term funding pressures? And realistically, when would you like to retire?
It is time to be honest and confront the brutal facts because there is no better time to take control and build your financial future than right now.
Money is not complicated but changing our money mindset can be. Having a positive attitude, looking for ways to increase your knowledge base, setting goals that matter to you and getting disciplined are all important steps.
To begin, we need to dispel a few financial myths out there such as:
- A little debt never hurt anyone. Retiring with debt is tough and it will always be a drag on your balance sheet. Getting rid of debt is liberating and the best way to free up cash flow.
- You need a million dollars to retire. Clearly you don’t – but you do need to understand what your fixed costs will be, where your money is coming from and how you hope to live your life.
NEVER TOO LATE
All too often I hear, “It is too late for me to start building my nest egg.” Sure, had you started at age 20 and put away $213 a month ($2,600 a year) until you reach 65, you would in fact have saved $1 million (assuming an eight-per-cent historical rate of return). If you waited until age 40 and contributed the same $213 a month, you would only accumulate $190,000. The cost of delaying is huge.
But what about the 50-year-old who may be one of the 32 per cent of Canadians – according to a recent CIBC poll – who haven’t saved a dime for retirement? What are their options?
If you are 50 and make $75,000 a year, you’ve likely come to realize you need to push retirement out to age 75. You will need to save 10 per cent, or $7,500, per year (assuming a rate of 6.6 per cent for 25 years) and that translates to $448,000.
Regardless of your age and where you stand financially, it helps to break it down into operating buckets. In our household we have set up the following:
- Operating bucket for household expenses.
- Reserve bucket for the unknowns, emergencies or whatever life might throw our way.
- Retirement bucket for setting money aside for our golden years. This allows us to benefit from time and compounding, appreciate the importance of rebalancing and forces us to look long term. The point is to enjoy today while planning for tomorrow.
- Investment bucket in which we pay ourselves first through pre-authorized payments monthly, right from our pay. By being non-negotiable and automatic, it helps to eliminate the dangers of market timing.
CREATE GOOD HABITS
How do you find money for retirement savings? You have to eliminate the spending habit, live below your means and ditch your bad debt.
Create a savings habit, embrace investing and benefit from the compounding habit.
You need to learn more to earn more.
And finally get real, choose a destination and set some goals. The savvy person is the one who acknowledges they can’t do it alone and seeks some help.
It is never too late to start saving for retirement. However, the sure way to destroy your retirement is procrastination. The old adage “there’s no better time than now” is so very true.