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The Money Management Newsletter: RSP Planning
Plan for a comfortable retirement

If you want sufficient assets for a comfortable retirement, start planning now. Some experts say you'll need 60 to 75 per cent of your present income once you stop working and even more if you want to travel or keep up expensive hobbies. You are the best judge however of how much retirement income you will need, based on the lifestyle you intend to lead. Plan on needing your retirement income stream for two or more decades because at the age of 65, you can expect to live to age 81 if you are a man and 84 if you are a woman.

Unfortunately, too many people are counting on the solutions of yesterday to address the retirement needs of tomorrow.

Consider employee pension plans. How many people these days work for the same employer for 45 years straight? Not many. The threat of companies going bankrupt and leaving unfunded pension liabilities or even attempting to collapse their pension plans is an ongoing problem. Your company pension plan may not be as secure as you think. Many companies are switching from defined benefit pension plans where they assume the risk of funding a guaranteed pension amount, to defined contribution plans where the employee takes the investment risk.

Your home equity may not be the answer either, if you wish to continue living there and do not want the erosion of estate value that a reverse mortgage would create.

The Canada Pension Plan and Old Age Security are not intended to meet retirees full income needs, although spouses who each receive the maximum C.P.P. and O.A.S. may get by if they have modest retirement expenses. Problems can occur however if one spouse dies, as the reduced total pension for the survivor may not meet all income needs.

As sure as night follows day, smart Canadians are heading toward comfortable retirements by supplementing their private and government pension expectations with both registered and non-registered investments.

How much do you need to save to attain your retirement goals? The short answer is,… as much as possible. Investment advisors can take you through the calculations once you provide the necessary details.
The earlier you get started and the more you contribute, the better. Here is some math to demonstrate why. If you tuck away about $300 a month from age 25 on, and if your savings earn at least eight per cent annually, your retirement savings will be worth almost $980,000 by the time you turn 65. That sum could provide you with a RRIF that starts out paying you about $40,000 a year. If you wait until you're 35 to start contributing, you will have to come up with more than double that -- almost $700 a month -- for the same retirement nest egg. And if you procrastinate until you're 45, you'll need to contribute a hefty $1,700 each month. The picture becomes bleaker if the investment returns average less than 8%, which is a good possibility in a low interest rate environment. Investors will have to try to save more money to fund their retirement plans or invest in more volatile investments in the hopes of earning higher average returns.

You should start earmarking a manageable percentage of your own income, right now, to go directly into your RRSP. It is a good idea to aim to "pay yourself" 10-15 percent of your income, right off the top. Most financial institutions will let you make monthly or more frequent contributions into an investment or RRSP plan by a direct withdrawal from your bank account. You won't spend what you don't see!

Regular investing not only guarantees an ongoing savings plan for your retirement. It evens out the risks of interest rate fluctuations and averages your costs into the equity market.

You'll reap the benefits in your old age.

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25 Lakeshore Road, Oakville, On L6K 1C6.
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