Canadian Living: What is the ideal age to set up a budget for retirement?
Tom Zaks: Many young people feel like they have lots of time ahead of them to start saving for retirement. Then one day they wake up and have minimal savings set aside for their golden years. If you can get into the habit of saving on a monthly basis this habit will last throughout your lifetime. The sooner the better is always the ideal.
Canadian Living: How does age factor into setting aside money?
TZ: Age is a tremendous factor due to the power of such things as compound interest and dollar cost averaging. With compound interest, the more you save, and the longer that money earns money, then the larger your nest egg will grow. The same thing applies to dollar cost averaging, which is the concept of buying into equities on a regular basis at different prices. As the markets go up and down in the short term, the investor will be able to buy at different prices, including dips in the markets. As the market goes up over time, this will have a powerful affect on how these investments grow.
Canadian Living: Is there a rule of thumb for saving for retirement?
TZ: There are many rules, but one that stands out is the old adage "pay yourself first." This is all about setting aside money with each paycheque, and the earlier on an investor learns this lesson, the better.
Page 1 of 2 – Discover real-life strategies to help you save for your retirement on page 2.Canadian Living: Aside from the obvious (cutting out that expensive morning latte), do you have any tips on how people can discipline themselves to save money for retirement?
TZ: Having a plan, setting goals and sticking to a budget are all good things. Based on your current situation, you want to be realistic about the amount of savings you can achieve in any given time period. But we all want to be able to live our lives on a daily basis without too many limitations. Creating a budget will open your eyes as to what you spend in a month and will identify which items you are overspending on. If you can stick relatively close to your budget then you may not have to cut out that morning latte to reach your goals. The other thing to do is to reward yourself for hitting those goals.
Canadian Living: You need one million dollars for retirement. Is this a media myth or realistic goal?
TZ: Some people may need more than a million dollars while others may need less. This will depend on the individual, and depend on the lifestyle that they would like to achieve in retirement. Many retirees travel more, while others prefer to stay home and enjoy their grandchildren and have no really expensive habits.
Canadian Living: Part two of the question above – how can people not be scared of this million-dollar retirement savings number?
TZ: If you do the calculations and break this number down, then it does not need to be too scary. For example, someone who is 20 years of age and saves $250 per month in his or her RRSPs with an average rate of return of six per cent on these investments will be able to save just over one million dollars by the time they are 65. If you are older, then you simply need to break down what your required savings amounts would need to be.
Canadian Living: What else can we do?
TZ: Try to learn what tax and investment strategies are available to us as Canadians. For example, Tax Free Savings Accounts are a great new way of putting dollars aside into a tax shelter. Also, try to maximize any income splitting with other family members.
Page 2 of 2 – Do you know how much you should have saved up by the time you retire? Find out how much the experts think is enough on page 1.