November 23, 2016 / Published 10:00 AM EST / Alyssa Charles
Financial literacy 101: Retirement planning
There’s a lot to wrap your head around when it comes to your finances but a good understanding of some basic financial concepts can really take you a long way. November is financial literacy month in Canada and although Canadians received high scores when their financial knowledge was tested, many still lack confidence in their skills. As part of a three-part series, spoke to Manulife Securities Financial Advisor, William Bell and Retirement Specialist, David Demant to get their perspectives on some frequently asked retirement planning questions.
How much do I really need to retire?
Different people have different ideas about how much you should be saving for retirement. Many advisors say you need retirement cash flow equal to 70% to 80% of your peak-retirement income1. But one size doesn’t fit all. “The “70%” rule of thumb is a good place to start” says William, “but that’s all it is.” Everyone’s goals are different which is why it’s important to plan how you want to live in retirement and what steps you’ll need to take to get there. Working with a financial advisor can have a huge impact on meeting your financial goals. According to a 2015 study, those who have financial advisors acquire 2.73 times more wealth than those that don’t.
How can I maximize my retirement savings?
A 2015 Investor Pulse survey revealed that one in four Canadians are clueless about their current investment options and only 36% are at least somewhat knowledgeable about what types of investments they should consider to maximize their retirement savings1. Although there are many investment options that can be utilized, perhaps that shouldn’t be the focus. “It’s interesting that we spend a lot of time worrying about what kinds of investments are best, rather than worrying about how to invest more,” says William. Unfortunately, both RRSPs and TFSAs are underutilized with many people not maximizing their contribution limits. This is generally not because they don’t want to, but simply because they don’t have the money left at the end of the month to contribute. “Automatic savings plans and employer plans the two things people should be utilizing” says David. Setting up an automatic RRSP contribution on the same day you’re paid allows you to pay yourself first and save for retirement without really thinking about it. David also suggests taking advantage of any plans through your employer. “Utilizing employer plans that match your contributions is an easy way to turbo-charge your savings.”
I haven’t been saving as much as I should for retirement. What are some strategies for getting back on track?
One of the fundamentals of retirement planning that William continuously echoes is having a plan… and sticking to it. If you have a plan but you’ve somehow managed to fall off track, it might be a sign that your plan needs some revision. If you don’t have a plan, here are 6 things you can do right now.
Along with having a plan, David says that “understanding your investment options isn’t as important as understanding the risk of your investments and the fee that each investment charges.” Taking on too much risk and paying high fees can drain your savings, so it’s important to work with your financial advisor to determine your risk tolerance and figure out what investments will be best for you. “Investments can be complex, but asking for advice with regards to risk and fees is pretty straightforward and can make a huge difference.”