By Michael Edmondstone
Planning for retirement can be a tricky endeavour: it’s all about calculating odds and balancing probabilities. Many Canadians don’t even start thinking about ways to start saving for a wealthy retirement until mid-career, which means they must make larger lump sum payments to meet their retirement fund goals or face an otherwise uncertain financial future. The key to enjoying a worry-free retirement early is planning early. Consider implementing these savings and investment tips to help you retire rich:
Registered Retirement Savings Plans (RRSP)
Even if you have the good fortune of a job that includes a pension, you may want to consider setting up and contributing to a RRSP. A RRSP will provide you with some cushion between your pension and your government pay-out to buffer you against inflation and finance those extra whims and fancies. For the rest of us, RRSP are still a common retirement savings option because our contributions are tax-deductible. Furthermore, the income earned in the RRSP itself is not taxed unless it is withdrawn. What are good reasons to withdraw? Using the money in your RRSP to participate in the Lifelong Learning Plan or Home Buyer’s Plan, which allow you to use RRSP funds towards your education or purchase of a home. You have up to 15 years to repay these funds without being penalized.
Tax-Free Savings Accounts (TFSA)
Another way to supplement your retirement savings is by opening a tax-free TFSA. Canadians 18 years of age and older are eligible to contribute up to $5,000 toward a TFSA each year, plus any unused TFSA room from the prior year or withdrawals from the previous year. Unlike the RRSP, there are no withdrawal penalties. A TFSA can also make a nice complement to your investment portfolio (see below) as investment products includes GICs, bonds, mutual funds, and stocks.
The best portfolio is a diversified one. That means putting some of your money in fixed-income investments like bonds and GICs as well as investing in Canadian and foreign stocks. Depending too much on the former raises the risk of inflation, and too much emphasis on the latter could lead to big mistakes that could cripple your retirement fund. Be realistic and keep market fluctuations in mind as you plan for retirement. Plan to begin your retirement by withdrawing only 4% of your investment portfolio’s initial value each year.
Responsible Credit Card Usage Present and Future
By now, we all know the pitfalls of credit card usage—potential for high interest rates, accumulated debt, and a damaged credit history—but if you use credit cards responsibly, you could reap rewards that will actually help you save money in the long run. Many traditional and prepaid credit cards offer cashback rewards programs that credit your account annually with savings earned from supermarket, fuel, or other shopping purchases. Other credit card rewards programs allow you to collect points toward free air miles, home improvements, and future shopping purchases. Just be sure to pay off the full balance on your card each month so that you’ll enjoy a debt-free retirement later on in life.
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