What to do if you are behind on your retirement planning?
01 September 2023 0
01 September 2023 0

Enriched Academy Staff

You don’t have to look very hard to find a survey that highlights the poor state of retirement preparedness many Canadians are feeling. An April 2023 survey from tax specialists H&R block found that 53% claim to be behind on their retirement savings, and that they are planning on working part-time to make up the difference when they do retire. BMO didn’t find much better news — their February 2023 study found only 44% of respondents reporting they’re “confident” they’ll have enough money to retire. This was 10% lower than their 2020 survey!

The fact is that most of us don’t need a survey to tell us we are behind on our retirement savings plan. With the rapidly rising cost of food, gas and other necessities combined with drastically higher interest rates on mortgages, we know there isn’t much left to put towards retirement savings at the end of the month. If you find yourself behind on your retirement planning, it's important not to panic. While starting early is ideal, there are steps you can take to catch up and improve your retirement outlook regardless of where you are at right now.

What is retirement planning?

Retirement planning refers to the process of setting and achieving financial goals to ensure a comfortable and secure retirement. It involves making strategic decisions about saving, investing, and managing your finances throughout your working years so that you can maintain your desired lifestyle and cover your expenses after you stop working. Retirement planning takes into consideration factors such as your age, current financial situation, expected retirement age, desired standard of living, life expectancy, and potential sources of income during retirement.

How to plan for retirement in Canada?

Financial planning for retirement starts with carefully evaluating your current situation, including your savings, investments, debts, expenses.... even your tax bracket! Understanding where you stand is the first step toward making a realistic plan. Increasing our savings is where most of us focus, but it is just one of many considerations. For example, do you invest those savings in a tax-advantaged account like an RRSP or TFSA and are you taking full advantage of these accounts? Do you take the time to review the type of investments you hold and analyze your returns, the fees you pay to hold/manage those investments, and adjust the asset allocation/risk of those investments based on your life situation? If you are 35 years old, the type of investments you hold and the associated level of risk is a lot different than someone who is 62 and expecting to retire in 3 years.

Debt is another key consideration. House prices have risen dramatically over the past 10 years and it is getting increasingly difficult to burn the mortgage before retirement. If you have tapped into your equity with a line of credit, what is your plan for eliminating that debt? If you are carrying debt into retirement just make sure you will have the income to service that debt. For example, if your house has a basement suite and renting could cover a substantial part of the mortgage, then maybe you have solved the problem!

Retirement planning

How much money do you need to retire?

It sounds painfully obvious, but most of us haven’t actually determined how much money we will need in retirement. All of us have retirement dreams (or at least expectations) and it’s time to start assigning some costs to those dreams. A lot of major expenses like your home or the kid’s education may be paid, but there are still lots of other things to eat up your income. Are you planning to travel more, and is that five-star resorts or your favourite campground?  Are you staying in your home or downsizing? Will you carry any debt into retirement? Stats Canada found in 2019 that the average over 65 household spent just under $50,000 annually. Things are a lot more expensive now and that figure could easily be $60,000 in 2023, but the point is that there is no average. Retirement spending varies wildly between households and the only way to gain clarity is to sit down and start figuring out a budget that matches your retirement situation and needs.

Consider what age you plan to retire?

As you near retirement you may find your savings rate going up quickly as your monthly expenses diminish. You may want to consider working for a few more years than originally planned and bolster your retirement savings. Delaying the age you start receiving a pension usually means a higher monthly payout (CPP for example) and gives you a chance to max-out tax-sheltered/deferred investment options like an RRSP or TFSA. Working during retirement is another option and although it seems easy enough, keep in mind that you may not have the health, motivation, or be able to find a suitable employment opportunity.

When should you start saving for retirement?

Anyone who is asking this question needs a quick lesson in the power of compound interest over time. Putting $500 in your RRSP every month from age 25 to 65 with a 5% return would yield $725,000 — starting at age 40 would leave you with only $287,000. Sure, you would have contributed a lot more money ($90,000) but the difference at age 65 is shocking! The answer to when to start saving for retirement will always be as early as possible. The second key point about compound interest is that small differences in your rate of return can really add up over the years. If you increased the rate of return in our above example from 5% to 7%, your nest egg would be $1.2 million instead of $725,000! Any retirement financial advisor will tell you that piling up cash in a savings account is not the best way to grow your money. You should consider a mix of investments based on your risk tolerance, timeline to retirement, and financial objectives. You can take the time to educate yourself and manage your own personal savings and investments or check out our  financial coaching program for expert guidance and education.


Can I contribute to both an RRSP and a TFSA?

Both the TFSA and RRSP offer great opportunity for retirement tax savings and you can certainly have both. The issue of course is that it may be difficult to set aside 18% of your annual income to maximize your RRSP, and another $6500 every year to maximize your TFSA (especially when you are younger). The choice can be difficult and the optimal solution for tax efficiency will vary based on your income over your working (and retired) life, whether you are saving for a home, whether you may need to withdraw the funds early, and other factors. Understanding the differences between an RRSP and TFSA is the starting point and a little knowledge will go a long way. For example, early withdrawal from an RRSP can be quite punitive compared to a TFSA, so make sure you do your homework and improve your financial literacy to make an informed decision. The same goes for investing the funds in your RRSP and TFSA — your retirement investment plan and the associated fees will play a huge role in determining the size of your retirement fund.

Preparing for retirement is an overwhelming task, so it’s no surprise that so many of us kick it down the road.  Remember that every small effort you make today will add up over time. Start by defining your long-term goals and current financial situation, then list up a few simple action items you can start right away. It could be something basic like digging into your monthly expenses to find more retirement savings, to something much more involved like digging into your mutual funds and ensuring the risk, return, and investment fees meet your expectations and support your retirement goals. Make sure to revisit your retirement plan regularly, it’s not a static process and it’s critical to make adjustments to keep you on track.

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