“What do you want to do when you retire”?

Before I retired, I had dreams of doing nothing, or travelling or just spending time with friends. I have done a few of those things, but I have also done some things that were not even on my radar when I thought about retirement. I give workshops, I mentor, I am on three advisory committees to help seniors. My life is exciting but very different than I thought it would be at this time of my life.

I see this question being asked a great deal “What do you want to do when you retire”? It may be a long way off and it is a hard question to answer. By the way what you think or would like to happen probably won’t. This doesn’t mean don’t think about life after retirement, it is important to think about life after you stop earning a regular paycheque. Whether your goal is to travel, learn a new skill, indulge in hobbies or simply maintain your current standard of living, you’ll need to rely on savings to cover the cost of these activities, in addition to your everyday expenses.

By doing some groundwork well you can and learning how much you need to save, you can let your dreams drive your retirement, rather than letting available funds drive your dreams. Here are three things you should think about now that may boost your retirement savings, and some tips to help you a few years down the road.

Cut spending. Easier said than done, however, most experts suggest that you should save at least 10% of your income, with a portion of that put aside for emergencies. It’s easier than you think to find some extra cash for your savings by trimming unnecessary spending, but it does require some research and some work and discipline. I suggest if you are not saving at all start by saving 5.00 a day, (which is $1,825 a year) by setting up an automatic withdrawal program from your checking account to your savings account or an investment account. Ask the bank to increase the $5.00 gradually over time to $20 a day. $20 a day adds up as it is $7300 a year. Once you have the money flowing set up either a Tax-Free Savings Account or a Registered Retirement Savings Plan so you stay on track.

Start small. If you’re able to save as little as an extra $5. 00 a day, you can invest it in an RRSP or TFSA through mutual funds or the stock market, which can offer good returns. Whatever you do, spending less now means more for your retirement.

Maximize investments to pay less tax. All Canadians have access to a variety of tax-sheltered accounts, like RRSPs, RESPs and TFSAs, which delay or reduce taxes. Take advantage of these accounts by using as much of your contribution room as possible each year

Become debt-free. Eliminating debt, before you stop working, decreases stress on your reduced income – and leaves more room to do what you want in retirement. As soon as you can, start paying off credit cards, mortgages and loans, so you’re free of these burdens when you retire.

Consider downsizing. As you near retirement, think about lowering your larger expenses, like your home and vehicle. If you’re paying for square footage that you don’t need, opting for a smaller home will allow you to invest more for later. You can also save on car expenses, like gas and insurance, with a more affordable, fuel-efficient vehicle.

Work longer and ease into retirement. Retiring doesn’t mean you have to stop working entirely. Working fewer hours or getting a part-time job is a great way to transition into retirement and maintain steady cash flow. Try calculating how much your retirement income will be with government pensions and other programs. And, when the time comes, you can choose various registered and non-registered retirement income options, including RRIFs and annuities.

Prepare for the unexpected. Most people underestimate healthcare costs in retirement. As you age, your risk of developing a critical illness increases. It’s important that your retirement plan sets aside funds to cover personal healthcare. You can also investigate health and critical illness insurance from private companies.

TFSA or RRSP - Which one should you choose?

I know that Christmas is coming but soon after we will be looking at how we can save on our income tax and there will be many competing ads out there asking you to invest or save in a Tax-Free Saving Account or a Registered Retirement Savings Program.

When it comes to saving, the TFSA vs RRSP debate is always at the forefront. Many people are confused as to whether to choose the Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA) or a combo of both to put money away for the future. Regardless of whether you choose the RRSP or TFSA (or make use of both!), one of the best things you can do is invest consistently.

Both the TFSA and RRSP are investment vehicles that reduce taxes on investment income but depending on your circumstances, one might better for your money than the other. The TFSA is more flexible and offers a better tax benefit than the RRSP, but doesn’t have as high contribution room. The RRSP will probably let you set aside more, but has stricter rules around when you can withdraw your money, and what for. Ultimately, everyone should aim to have both an RRSP and a TFSA and spread out the savings across both accounts. Two of the most common investment questions are: “What’s the difference between an RRSP and TFSA?” and “Which one should I choose?”

Despite their names, neither the RRSP or TFSA have to be a savings account. You can and should hold a variety of investments in your accounts such as GICs, mutual funds, stocks, bonds, and ETFs. Both of these accounts should be more appropriately named “Tax-Free Investment Account” and “Registered Retirement Investment Plan” because investing is really the best way to unlock the power for these accounts.

The real difference between the RRSP and TFSA come down to their contribution limits and withdrawal restrictions, as well as how and when you pay taxes at these events.

The differences between a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) are outlined below. Which one you should choose depends on a few factors: your current tax rate, your reason for saving, and your future tax rate.

An RRSP is mainly intended for retirement savings.

·       Annual contributions are tax-deductible.

·       Your contribution limit is based on earned income.

·       Your contribution room begins at whatever age you begin working and filing a tax return.

·       The contribution limit for 2019 is 18% of the earned income reported on your 2018 tax return, up to a maximum of $26,500.

·       If you don’t contribute to an RRSP, your contribution room accumulates and you can contribute even larger amounts in the future.

The TFSA was introduced by the federal government in 2009, as a way for anyone 18 or older to set money aside tax-free throughout their lifetime.

·       Annual contribution limits amounts have varied over the years.

·       From 2009 to 2012, the maximum for each year was $5,000.

·       From 2013 to 2014, the amount increased to $5,500 for each year.

·       In 2015, the amount increased again to $10,000.

·       From 2016 to 2018, the amount decreased to $5,500 for each year.

·       In 2019, the amount increased to $6,000.

·       TFSA contributions are not tax-deductible and contribution room accumulates if unused. Anyone who was 18 or older in 2009, and has not yet contributed, will have $63,500 of contribution room available in 2019.

The chart below shows how different tax rates during your working years and retirement years can affect your decision to invest in an RRSP or a TFSA today, and the after-tax value after 20 years. 

News from Australia.

I have a special interest in Australia as my daughter lives there, so I was intrigued by this survey from Stockspot and the magazine Women’s Agenda. Here is some of what the survey of 800 women found.

First, women in Australia, wield a huge amount of power when it comes to household finances, with four in five saying they’re responsible for the purchasing decisions at home. Yet a number of barriers continue to hold women back from investing, widening the ‘investment gender gap’.

More than half of Australian women say a lack of trust in banks and financial advisers stops them from seeking out investment advice.

In the survey, women said that just over half (53 percent) of them have never seen a financial or investment adviser, while a majority (57 percent) cited a lack of trust in the guidance they offer.

Two-thirds (66 percent) of all women said revelations from the royal commission had affected their trust in the sector – with the respondents being more likely to trust their own online research above anyone else when they seek advice.

The survey saw 57 percent of women list internet research as their most trusted source for advice and innovation, compared with 39 percent who felt most at ease with their investment or financial planner.

Only 37 percent said they would trust a partner and 12 percent would trust a bank, the same proportion as those who trust no one.

Around 57 percent of women have invested in shares at some point.

The report noted that 48 per cent of women said they had a lack of money to make it worthwhile, as a reason preventing them from seeing an adviser.

The figures for women seeking advice escalated when considering individuals under the age of 35, with a third reporting having ever seen an adviser, with around half (48 percent) citing a lack of trust in the guidance given by professionals.

“A lack of money” was cited as the number one barrier to investing for 59 percent of all respondents.

Other top reasons included fear of losing money (48 percent), trust issues, lack of confidence (48 per cent) and knowledge (56 percent).

The report also found almost half of the women (44 percent) believe they are socially discouraged from investing in stocks.

Around 37 percent of women disagreed they would feel confident investing in shares if they had the money to do so and a further 17 percent strongly disagreed.

Looking at where women place their money, half of the survey respondents said they invest in a high interest savings account, while 60 percent own their home.

Around 39 percent reported making additional superannuation contributions while 38 percent had invested in shares and 29 percent had placed money into an investment property.

Currently, Australian women are retiring with around half (47 percent) the superannuation of men, indicated by Rice Warner figures. They are also earning less – with the national average for full-time workers is 14.1 percent less than their male counterparts.

Despite this, most respondents in the Stockspot survey did not lack financial ambitions: more than three-quarters stated they have “specific financial goals” they are looking to achieve or have already completed.

Women were also found to be much more confident about investing in property, with 61 percent agreeing with the statement and with 41 percent adding they would opt to pay off a mortgage before investing in the stock market.

Saving for retirement in the gig economy

Saving for retirement in the new economic reality will be hard. The new “gig economy” consists of freelancers, part-time workers, independent contractors, and the self-employed. It’s estimated that more than 40 percent of workers are no longer salaried employees and that this percentage will continue to grow.

These people will be solely responsible for their own retirement and financial well-being, if we don’t provide easy digital tools for savings, we could be looking at a generation of workers struggling to achieve financial security in retirement.

Apple Pay and Amazon’s one-click buying are examples of digital tools that have made it easier than ever to spend money. With tools like Robo-savings apps, the goal is to make saving money just as easy.

Another example is to provide just in time feedback to your mobile device. Apps that track your investment performance and spending habits can have a huge impact on your behaviour. Users of a U.S.-based app called Personal Capital decreased their spending by 15.7 percent. Most of that decrease came from discretionary spending, with users spending less on categories like dining out.

Results from government surveys support this behaviour. The majority of consumers with access to their financial information on mobile phones check their balances before making large purchases, and of those who check, 50 percent decide not to buy an item because of the feedback.

When I was teaching, one course I taught was financial literacy. A major issue with teaching financial literacy in school is that students can’t apply the concepts they learn until many months or years later. One study found that, like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behaviour 20 months or more from the time of intervention.

Using technology and apps that provide just-in-time financial information perhaps can solve this timing issue, providing people with crucial information when they need it the most.