You have a dream for your future. Maybe it’s exciting; maybe it’s relaxing; maybe it’s a combination, but it’s definitely not a cliché filled with “taking it easy” and quiet hobbies. This is your chance to do something you’ve dreamt about for years: an opportunity to throw hard-earned life experience at a blank canvas.
So how do you ensure that you’re able to enjoy the fruits of retirement? The best way is to maintain your health – and we’re not just talking about a sensible diet and hitting the gym. Focusing on your financial health will get you in shape to translate your retirement dreams into reality.
When it comes to saving for retirement, each strategy is going to be different depending on your goals, financial circumstances, and the time you have to save. Luckily, there are many possibilities to consider for investing, including long- and short-term options that personalize and maximize your savings potential.
The road to successful saving begins with understanding what’s out there and taking that first step, which is formulating a good plan.
The conversation about long-term investing can’t begin without first talking about RRSPs (Registered Retirement Savings Plans). If you’re not familiar, an RRSP is comprised of a collection of investments. Contributions are made with pre-tax income, meaning the money you put into your RRSP is tax-sheltered, and deferred from the taxman until you withdraw it.
The goal with RRSPs is to save while sheltering portions of your income annually from taxation by investing it and earning compounding interest. By the time retirement comes around, your annual income will be lower so the money you withdraw from your RRSP will be subject to a lower tax rate than when you put it in.
As a long-term investment, RRSPs have benefits and pitfalls and work differently into every savings strategy.
The benefits are you get a great tax deduction, and you’re forced to save the money contributed because any funds you withdraw are subject to withholding tax unless they’re used for school or a first-time home purchase. And, RRSPs are especially useful if you’re expecting to drop a few tax bracket rungs when you retire.
But remember—tax is deferred on RRSP contributions and isn’t tax-free. So take a hard look at where you’ll sit as an earner in retirement, while factoring in things like your pension to understand the tax your RRSP withdrawals will be subject to. Also, you can’t touch your contributions without a penalty - aside from the uses mentioned above, that is. But hey, that can be a good thing because it helps you focus on saving, right?
Your best plan? Contact a Northern Advisor and find out how RRSPs can work best for your savings strategy.
A TFSA (Tax-Free Savings Account) is a relative of the RRSP but works a little differently. Like an RRSP, a TFSA is made up of an assortment of investments, however contributions made to a TFSA are made after tax.
Keep in mind there are no tax refunds to be had. The good news is because the tax on your contribution has already been paid, you can withdraw from this account without any penalties. Another plus is that TFSA investments generate compounding interest tax-free – this can make a big difference, especially if you start investing at a young age.
The maximum allowable contribution to a tax-free savings account is $5,500 for 2018. If you’re a first-time contributor to a TFSA though, and were 18 years old after the year 2009, you can take advantage of the maximum accumulated TFSA limit of $57,500.
Since there are no penalties for withdrawing from your TFSA, this saving strategy can be useful for low-risk short- or long-term investing.
The ebb and flow of financial markets is enough to make your head spin. However, fluctuating interest rates can create opportunities to earn while markets are strong.
If your money is locked in a long-term investment and interest rates spike, you might be missing out on the benefits of these higher-earning opportunities. This freedom to work with the markets at a lower-risk is why short-term investments like GICs (General Investment Certificates) are a great option for your savings strategy.
GICs offer a guaranteed, completely secure, low risk investment. Just park your savings, earn the interest and when your GIC comes to term, re-evaluate your investing strategy with a matured principal.
With more money in-hand, you’re able to up your earning potential on investments and get ahead in the savings game.
You can also apply this simple and effective savings strategy using GICs of varying terms. Just know that the longer the term is, the higher the interest rate will typically be.
As always, it’s best to consult the financial experts at your local credit union to see how GICs can fit into your savings strategy.
Like the top golfers in the world, a well rounded long and short game is the key to getting to the top of the leader board. Planning for retirement using a diverse savings strategy made up of long- and short-term investments can be the key to optimizing your financial health to meet your future goals.