Saving for retirement is one of those financial moves that many people postpone for much too long. Whether for lack of information or sheer neglect, failing to plan for old age is a mistake many live to regret. The Canada Pension Plan (CPP) covers only a fraction of your income as a worker, so you will need to take extra steps to ensure you have a comfortable retirement.
Financial experts agree that it is best to start saving for retirement in your 20s or at least early 30s. The sooner you start, the less pressure you will feel. Still, even if you immigrated at a later point in your life, start saving as soon as possible.
RRSPs and TFSAs
A Registered Retirement Savings Plan (RRSP) can help you achieve the comfortable retirement you desire. RRSPs can be set up at banks, insurance companies and other financial institutions. You can set an RRSP up for yourself, for your spouse or common-law partner. You can also start what is called a self-directed RRSP, where you manage your own investments.
A group RRSP can be set up by your employer who may even match your contribution, thus doubling your savings on the spot. If your company has an RRSP plan, enquire about it so as not to miss out on sizeable contributions to your retirement.
An immediate advantage of setting up an RRSP is that it can bring you significant tax deductions, but any withdrawals from it are taxable. The maximum RRSP contribution allowed for 2011 was 18 per cent of your earned income, as long as it does not exceed $22,450.
Tax-Free Savings Accounts (TFSAs) allow you to save and invest your income in a tax-sheltered environment. You can contribute up to $5,000 annually to your TFSA. Unlike the case of RRSPs, contributions to TFSAs are not tax-deductible, but withdrawals are tax-free.
For people on lower income who cannot afford both plans, TFSAs make more sense, because withdrawals are tax-free and they do not impact any other benefits and tax credits. You can also use the assets in your TFSA as collateral to obtain a loan.
RRSPs and TFSAs are perfectly complementary. If your income permits, you can have both, as they are both effective ways of saving for the future. In both RRSPs and TFSAs, you can accumulate what is called “contribution room,” meaning that, if you don’t contribute to the maximum limit in one year, you can contribute more the next year until contributions balance.
Other forms of investing
Everybody wants to make the most of their savings. Fortunately, in Canada you have numerous options of investing your money. It is a good idea to not put all your eggs in one basket and to maintain a diverse investment portfolio.
Some of the most popular investment options are the following.
Term deposits are secure investments that can generally offer a higher rate of interest than a simple savings account. They are available in a number of currencies, a variety of term lengths, and several redemption options.
Guaranteed Investment Certificates (GICs) are low-risk investment certificates with a guaranteed, but low return rate. Their terms can range from six months to 10 years. They come in different versions: redeemable and non-redeemable, with fixed or variable rates, registered and non-registered. Each version has its advantages and disadvantages; easy access comes at the cost of a lower interest rate, while higher interest locks in your investment for a longer time.
Canada Savings Bonds (CSBs) and Canada Premium Bonds (CPBs) are issued by the Bank of Canada every autumn and accumulate interest over time. They mature in 10 years and the interest rate is guaranteed for one year. The difference is that the CPB has a higher rate of interest than the CSB, but can only be redeemed at a specific time during the year, while the CSB has a lower interest rate but can be redeemed at any time.
Treasury bills (T-bills) are short-term investment instruments, fully guaranteed by the Canadian government, that mature in less than one year. They can be sold before they reach maturity, and their market value at that given moment can bring you a capital gain or a capital loss.
Stock market investments can bring you significant returns in a relatively short period, but they also carry a high risk. To outsiders, investing in the stock market may look a lot like gambling, a matter of sheer luck. While strokes of luck (and bad luck) can and do occur, treating the stock market like a casino is bound to bring negative consequences.
If you have little knowledge of the Canadian stock market, you should take the time to educate yourself before making any investments, or look for a licensed stock broker specialized in the type of market that interests you.
Mutual funds are made up of a pool of funds collected from many investors for the purpose of investing in stocks, bonds, money market instruments and similar assets. Mutual funds are operated by fund managers, who invest the fund’s capital and attempt to produce income for the fund’s investors. It is considered less risky than buying stocks, but riskier than GICs and bonds.
Some investors prefer to invest in palpable things like real estate, gold, collectibles or art, wanting to keep their money where they can see it. While such investments can have a positive psychological effect and can bring massive returns, they are by no means risk free. The choices you make should depend on your knowledge of a particular field and of the market for it. The good news is that nowadays it is easier than ever to educate yourself on the various forms of investments.