When is the best time to start planning for retirement? In your late twenties, early thirties, or maybe when you start approaching your forties? Retirement planning is different for everyone and can depend on your situation. However, the sooner you begin planning for retirement, the better.
Let’s explore what retirement planning can look like at different stages of life.
Factors to Consider for Retirement Planning
Your age
Most people retire in their early sixties, and to a large extent, this may be due to the age requirement for the Canada Pension Plan (CPP) retirement pension payments being at least 60. Some people plan to retire much earlier, and others, even later.
Regardless of your age, if you have started earning income and filing your taxes, you should take advantage of the retirement savings provisions through the registered retirement savings plan. Even better, if your employer offers retirement savings benefits, that can be a great opportunity to take advantage of lower Registered Retirement Savings Plan (RRSP) management fees or employer-matched contributions.
Your risk profile
Your investments in a registered or non-registered account should reflect your investment risk appetite. At earlier stages of your life, with many more years left until retirement, there may be opportunities for high-risk investments in volatile assets such as stocks or even alternative investments such as real estate, private equity, or debt.
However, as you get older, your risk appetite should decrease, with most of your investment assets becoming relatively safer and more liquid. Retirement planning in later stages of life may mean switching your investment asset composition from equities to fixed-income securities like bonds or guaranteed investment certificates (GICs).
How much do you need to retire
The amount you need to retire depends on how much income you need to replace when you stop working. For example, in retirement, you may decide that 60 percent of your current income is enough to sustain you. So, if you currently earn $100,000, you can plan to receive about $60,000 in retirement from all your income sources. Your income in retirement should cover your financial obligations, such as rent or mortgage, feeding, transportation, medication, and other day-to-day living expenses.
Income sources in retirement include Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), Old Age Security (OAS), Employer-pension plan, Tax-Free Savings Account (TFSA), and Registered Retirement Savings Plan (RRSP), amongst others.
The income you receive in retirement may depend on how much contribution you have made to your pension plan, your net income in retirement, and how well your retirement investments have performed over the years.
The compounding factor of investing typically impacts investment returns; thus, investing earlier may be beneficial for your retirement portfolio.
At earlier stages of life, you have a more extended period until retirement and may have time to catch up on your retirement savings. However, as you get older, you may need to invest more if you haven’t started earlier. It’s never too late to start planning for retirement.
Family and Dependents
Your family situation is an important factor that impacts your retirement planning by stage of life. If you have dependents or plan to at some point in your life, you may need to incorporate them into your retirement plans.
Creating a will and getting a financial planner to help with estate planning may be beneficial at certain stages of your life.
You also need to consider your current tax bracket and the one you expect to be in when you retire. Understanding your income taxes will help you plan appropriately for retirement.
Bottom Line
Your retirement plan does not have to be static and can change as you get older. When strategizing on a retirement plan, the important factors to consider are your age, family, income, investment plan, and tax.
The replacement income you need in retirement depends on your lifestyle and any financial obligations you have at the time, such as a car loan or a mortgage.
Retirement planning should not be complex, and you may need to speak with a financial planner and tax specialist to ensure you have appropriate plans in place. Don’t fret if you have not started planning for retirement; the best time to start is now.
