Pay Yourself First
Retirement Planning: Just Starting to Save?
Saving for retirement may not seem like an urgent task if your golden years are far off, but the sooner you start saving, the better, because your money can have more time to work for you and potentially grow.
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Set a goal of saving 10% of your income every year. If that seems unrealistic, start small and make saving a habit.
Most financial experts agree that the key to saving is paying yourself first. To accomplish this, look at what's left over each month after paying bills and decide how much you can add to your savings. The exact amount is up to you, but keep in mind your end goal of saving 10% per year. Even if you begin by setting aside less, you'll still be better off than if you saved nothing.
Some people pay themselves by physically writing out a cheque, payable to themselves, and depositing it in a savings account or plan. Today's electronic world offers much easier options.
Assess your savings progress after a couple of months. If you're easily meeting the goal you set and not feeling a pinch from setting that money aside, consider boosting your contribution by 1%. Then schedule a date once or twice a year to reassess and possibly raise your savings contribution again.
If you're struggling to save the initial amount, or even to pay your monthly bills, take a hard look at your entire financial situation. Do you have unnecessary spending you can eliminate? Paying bills and saving for your future should trump eating out, premium cable or designer denim. Plus, these expenses may mean more when they're a reward you give yourself and not the norm.
Where to Save
There are many tax-advantaged ways to save for retirement, with Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA) being more top of mind. Another great option is a Universal Life policy*. These policies build cash value that can be drawn on later in life.
An employer-sponsored retirement plan may be your first consideration. Most companies will allow you to have contributions deducted directly from your paycheque, making regular investing easy. In addition, some employers will match RRSP contributions, up to a certain percentage of your compensation or a specific dollar amount. If your employer provides a match, work diligently to contribute the maximum amount that your employer will match. Otherwise, you're essentially turning down free money for your retirement.
If you are maximizing your annual RRSP contributions, or if you have a lower income or want to reduce taxes on your investments, a TFSA might be a better option. Your investments will compound over time and any earnings from investments are sheltered from tax — even upon withdrawal. Over 20 or 30 years, this could potentially add up to significant savings.
If you really have a handle on your savings, open both an RRSP and a TFSA. You can contribute up to the allowable annual limits to a TFSA, even if you also participate in a retirement program through work (although contributions to a TFSA are not tax deductible). You'll want to contact a tax advisor regarding your personal situation.
Life insurance is always an important part of your finances that should never be overlooked. Life changes and so do your life insurance needs. Universal Life insurance is a flexible policy that allows you to adjust your coverage and your premiums to meet your needs1. A Universal Life policy is a flexible way to help protect your loved ones and build tax-deferred cash value. Premiums are deposited into your account (after a premium expense charge), where they earn the current interest rate (which will never be less than two percent). Every month, various deductions, such as the cost of insurance, are made from your account. If sufficient funds are available you can also take loans or make withdrawals.
Establish an Emergency Fund
While you're saving for the future, don't forget about the present. An emergency fund is important for unexpected expenses. Financial experts recommend setting aside the equivalent of three to six months of your take-home pay or expenses. Store this money in a separate interest-bearing savings, chequing or money market account to make sure the money is easy to access if you need it quickly.
Whatever your savings plan, don't put it off. The sooner you start saving, the more money you'll likely have for retirement — and the easier it will be to make saving a priority.
This is a general description of coverage. A complete statement of coverage is found only in the policy. For more details on coverage, costs and restrictions, or to apply for coverage, contact a local State Farm agent.
1With Universal Life, it is possible that coverage will expire when either no premiums are paid following the initial premium or subsequent premiums are insufficient to continue coverage. Changes in policy coverage amounts are subject to policy limits. Increases are subject to underwriting and may require additional premium.
Unpaid loans and withdrawals will reduce the death benefit and policy cash value. Loans also accrue interest.
Insurance policies and/or associated riders and features may not be available in all provinces, and policy terms and conditions may vary by province.
*Mutual Funds are not insurance products and are distributed through representatives of State Farm Investor Services (Canada) Co. State Farm Investor Services (Canada) Co. is a separate legal entity from State Farm Mutual Automobile Insurance Company, or any of its insurance affiliates.
Please read the applicable Fund Facts before investing. Commissions, trailing commissions, management fees, and expenses may be associated with mutual fund investments.
Mutual Funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.
Neither State Farm nor its agents provide tax or legal advice. Please consult a tax or legal advisor for advice regarding your personal circumstances.
State Farm branded policies are underwritten by Certas Home and Auto Insurance Company or Desjardins Financial Security Life Assurance Company.
State Farm Investor Services (Canada) Co. Aurora, Ontario.