Dear Caroline, A woman at my bank just told me I need to save up approximately a million dollars in my RRSP to retire. Needless to say, I find this figure a tad overwhelming. Is she right?
A: Stephanie, I don’t want to scare you, but depending on what kind of lifestyle you want when you retire, you might actually need to save more than that. Yes, a million dollars seems like a ton of money (and it is!) but consider that the average life expectancy of a girl born today is 81. So if you stop working at 65, you need to be able to cover your expenses for at least 16 years. Based on that, a million dollars buys you a before tax income of $62,500 a year (after tax you’re looking at under $50,000 a year according to 2011 numbers for your province, Ontario). And if you live longer, well you need money for that too…
But before you start to panic, take heart – there are lots of other things you need to consider before deciding how much to save for retirement. Your age is a big one. You didn’t say how old you are, but the earlier you start saving the less you actually need to put away for retirement, all thanks to the magic of compounding. Consider this example: two people both save $1000 a year earning 5% interest annually. Person A starts saving at 20 and stops at 30 (10 years), while Person B starts at age 30 and stops at 65 (35 years). Who do you think would save more money? Thanks to the magic of compound interest, Person A would have nearly twice as much money than Person B even though she saved for much less time. So if you’re young, time is definitely on your side. Seriously, check out this calculator and crunch the numbers yourself.
Another important thing to think about – registered retirement savings plans (RRSPs). RRSPs aren’t the only way to save for retirement. Do you have a pension plan or group retirement savings plan at work? Will you be eligible to receive government benefits like Canada Pension Plan and Old Age Security?
Are you planning to buy a home? A home can be a great way to save for retirement since anything you earn from the sale isn’t subject to tax while your RRSP savings are.
Also, depending on how old you are, a tax-free savings account (TFSA) might be a better bet because the money you take out of it isn’t subject to tax. Check out this post I did comparing TFSAs and RRSPs to see which one might work for you.
Finally, lifestyle is a big factor to consider. If you want to be one of those retired couples in the ads at the bank (sipping lattes in Italy or sailing in the Caribbean) then, yes, you might need to save a lot more. But you might be just as happy sticking close to home and finding cheaper ways to spend your time. In that case, you can plan to save much, much less (and maybe even retire earlier than planned).
My point is how much you need to save depends on a lot more than a million dollars – it’s based on lifestyle goals, age, and a host of other factors too (including what age you want to retire at). I would recommend trying out this Government of Canada calculator, which can help you determine how much to save based on your needs and CPP and OAS contributions as well.
Dear Caroline, I have four credit cards. Is this a bad idea?
A: Not necessarily – the average person over 18 in Canada carries about three different credit cards and there’s no hard and fast rule about how many you should have. You do need to worry if you’re carrying a balance on them from month to month. If that’s the case, four cards is too many and you need to focus on paying off the debt and even consolidating it into a single line of credit with a lower interest rate.
Another thing to consider: are you paying an annual fee for any of your cards? Some rewards-based credit cards actually do charge a fee. If that’s the case and you’re not using it, then you could be wasting your money. Try this credit card comparison tool from the Financial Agency of Canada – you can compare the features and interest rates of different cards and you might even decide to change cards or narrow down your list to a couple that do everything you need.
Personally, I have two credit cards with different banks. The one I use most offers me travel rewards that my family uses when we book our holidays. The other I use for work-related expenses. I pay the balance off on both every month. The more cards you have, the harder it is to track expenses (and it’s just one more bill to keep track of on top of it all!).
Dear Caroline, I have about $500 to spare each month after mortgage payments and expenses. Should I put that into paying off my line of credit as fast as I can or building up my RRSP? Or should I do a bit of both? And if it’s both, should I put more into one than the other?
A: Extra money at the end of the month? Great news! Even better news is that you’re using it to pay off debt and save, rather than buy more stuff. The question is – where to start? If you read my blog, you’ll know that I’m a big fan of paying off debt since you’re paying interest on the loan and, hence, it’s costing you money to carry it (and interest rates are going to rise eventually). Not to mention the psychological stress that carrying a debt load represents (for me at least, I don’t like owing money). What you do depends on a few things though: how much you owe and what interest rate you’re paying to start. Also, do you already contribute to a pension or savings plan at work?
You could consider putting some into both pots every month by contributing, say, $200 to your RRSP and put the rest towards your line of credit. You could then use any potential tax refund from your RRSP contributions to keep paying off your line of credit next year when tax time rolls round. To play around with the numbers, Morningstar has a good calculator that will show you how much of a tax return you are eligible for based on your RRSP contributions, income and the province you live in.
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