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Last week a friend told me she didn’t know if she’d ever be able to retire. She went to school, has a good job and doesn’t really have any debt. But the idea of being able to save money for the future seems like an impossible task, it can seem overwhelming. And I think that’s a really discouraging mindset to be in.
Everyone has bills, mortgages or rent, loans (good and bad), debts and the list can go on and on. A lot of months it can be stressful enough to just ensure that you’re going to be able to afford to pay your bills and make sure you’re not living off of Mr Noodles and Pizza Pops. Plus after your liabilities are taken care of, you need a little cash so you can enjoy yourself and enjoy life.
That’s probably why retirement planning usually isn’t thought about until later on in life, it’s tough to think ahead when the present is so stressful. That and before looking into it, I thought I had to have a big account to invest before approaching a bank or had to have a plan through my employer. But the truth is you can take the initiative on your own and make it happen. Of course it requires planning, work and research but the results are more than worth the effort.
So how can we make retirement planning less intimidating? No one wants to sacrifice their quality of life and sacrifice doing the things they like to do. But surely we can all achieve our own financial freedom with the money we make, can’t we?
Let’s take a look at the numbers.
The typical retirement age in Canada is 65, so for the sake of math simplicity let’s assume you’re 25 years old. That gives you 40 years to plan and save for your retirement and at that age you’re way ahead of the pack. That gives you a lot of time and flexibility with your investment and saving options.
The famous saying “what comes up must come down” definitely applies to the stock markets to a certain degree. Although the markets have averaged a positive return over their history there are years of ups and downs. I’m sure over your lifetime you’ll hear people say “it’s a good time to get into the market!”, or “now’s the time to invest!”. But realistically investing in the stock markets really isn’t about timing, but it’s about time in. The earlier you invest the more time your money has the opportunity to grow, by means of compound interest. One thing to consider before beginning to save your money with an RRSP or TFSA (two types of savings plans available to Canadians) for the future is your current financial situation. A lot of debt, especially credit card debt, come with very high interest rates. If you were to invest your money in hopes of earning a higher interest percentage than those debt rates , that would be a very risky move and simple improbable. The better option would be to pay off your high interest debts prior to investing money in the stock markets.
Let’s say you’re 25 years old, no high interest rate debt and after you pay your bills, put aside money to spend on yourself you figure you can comfortably put away $100 a paycheck towards saving for the future. Because people can get paid monthly, twice a month or every two weeks let’s just say $200 a month goes towards saving for the future.
$200 a month X 12 months a year X 40 years = $96,000
The typical life expectancy age in Canada is somewhere in the low 80’s, so for the sake of simplicity let’s round it up to 85 years old. That means you’ll need to stretch your savings over about 20 years.
$96,000 / 20 years = $4,800 a year … Panic sets in.
That’s not nearly enough to keep yourself afloat in today’s world, you’ll have to factor in inflation too. Even if you doubled the amount you contribute you’re still only looking at $9,600 a year to live off of through retirement, and we already established that you can’t contribute more than $200 a month without sacrificing your quality of life. Getting a second job also sacrifices your quality of life, so what are your options?
The best option in my opinion is to invest your money.
Let’s take a look at the S&P 500 historical average compound annual growth rate of 9.5%. Making contributions of $200 a month for 40 years at an annual return of 9.5% (with your investments compounding monthly) turns what would equal $96,000 into $1,087,258.38. Panic is gone. In this scenario, by investing your money you would increase your savings amount by more than 12 times! Of course history doesn’t predict the future, but 90 years is a long time to collect data to determine an average return.
Just to emphasis how much time makes a difference in your investment portfolio, let’s look at making a single contribution now and waiting 40 years. If you made a single lump sum contribution of $10,000 when you were 25 years old with an annual rate of return of 9.5%, when you turned 65 it would be worth $377,193.99. Remember, that is just a one time $10,000, that doesn’t include anything you’d contribute moving forward.
Investing while you’re relatively young and allowing your money to grow by compounding will give you the best chance of retiring comfortably. Compared to saving insane percentages of your income, taking on multiple jobs to increase your income or living a truly unpleasant life by saving every penny. Investing gives you the easiest and most effective way to allow your money to work hard for you. You can see from the chart above that the longer your money is invested, the higher the returns are over time. Remember, it’s not about timing but about time in.
Retirement can seem like a really intimidating thing to think about and to plan for. But I think the best approach isn’t to put it off and be in the mindset that you’ll just worry about it later. Establishing good financial habits and making regular contributions will allow you to save for your future without really knowing it, until you open your account or see your account statement (I’ve saved that much already?!). With a commitment to letting your money grow, in most cases your savings account will be generating more income in interest than you will make in salary.
No matter where you are in your journey of saving for your financial freedom, whether you’re just starting out or it’s coming down to saving crunch time, I believe it’s important to have a plan and know what your options are. No two people have the same financial situations, so we all need a plan based around our own goals.
I’d encourage you to take a look at your finances today. A great thing to do would be to set up a budget to include what you make (after taxes), what your bills are and what your lifestyle cost of living is. You might even be surprised with how much your spending in certain areas. I know I was shocked with the amount I spend going out to eat and I had to narrow that down (but no Mr Noodles or Pizza Pops). If you have a solid sense of where your money is going you can determine if it’s going into the right places and see if there’s money left to invest. Another thing I’d recommend is if your employer offers an RRSP contribution plan to see if you can afford that. Having your contributions matched by your employer is the easiest and most guaranteed way to double your money.
Hopefully this article can help put things into perspective and make saving for your future a little less intimidating. Retirement planning doesn’t have to be something to fret or try to avoid talking about. If you are interested in investing but don’t know where to start, leave a comment and let’s start a conversation.
About the Author
Winnipeg based Financial Advisor focusing on investments, financial planning, and mortgages. I prioritize education, because I believe the more we know, the more we all benefit. It allows me to help people make the most of their financial future.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.