Savings Plans

Why do we need to start early?

Sanjeev Kapil is a senior financial planner with TD Wealth Financial Planning. He has been working in the financial services industry since 2006. He holds a master’s degree in business administration from Wayne State University in Detroit, Michigan.

1. What are the smart things to do with our money in our 20s, 30s, 40s, and 50s?

No matter how old you are, the most important thing is determining your long-term and short-term financial goals so you can implement a plan to achieve what truly matters to you.

In your 20s:

Once your debt is paid off, begin saving. Open a Tax-Free Savings account (TFSA). It allows you to contribute money and invest without paying any tax on earnings on that money. Be aware of your TFSA contribution limits as they may vary depending on your age. The TFSA program began in 2009. You start accumulating TFSA contribution space starting the year you turn 18. From 2009 – 2012 the TFSA limit is $5,000 per year. In 2013, 2014, 2016 – 2018 the TFSA limit became $5,500. In 2015 it was $10,000. In 2019, it has become $6,000. For example, if you turned 18 in 2009 or earlier, your contribution limit up to and including 2019 would be $63,500. Alternatively, if you turned 18 in 2013, your TFSA limit would be $43,500. If you have not contributed the max annual limit, it carries forward to future years.

Depending on your income, this is also a great time to start to contribute to a Registered Retirement Savings Plan (RRSP). Like a TFSA, an RRSP has contribution limits which depends on your prior years’ income. Ensure you are within your limits or there may be over-contribution penalties. A contribution to your RRSP allows you to deduct your taxable income by the amount of your contribution. For example, if your total income is $50,000 and you make a $5,000 contribution into your RRSP in the same year, your taxable income is now $45,000 ($50,000 – $5,000 = $45,000). In other words, you only pay income tax on $45,000 for that year. You will benefit more if your income is in a higher tax bracket where you can save substantially more with the use of RRSP’s. Speak with your tax and/or financial advisor for more details.

Consider life insurance. Your income doesn’t approve you for life insurance, your age and health does. When you’re in your 20s, you have an opportunity to lock in low premiums for a very long time at an early age. Speak with your insurance or financial advisor for more details.

In your 30s:

Your 30s is often a time to make significant financial decisions, like buying a home. You can use the money that you have saved in your TFSA, as well as use up to $25,000 of your RRSP without paying tax for the purchase of your first home. This plan is called the Home Buyers’ Plan (HBP). The government requires you to re-contribute this amount back into your RRSP over 15 years. You must make the minimum payments each year to avoid paying income tax on that amount. Ensure you understand the rules and guidelines of the HBP.

Your income should be at a higher level at this point. Maximize your contribution to your RRSP to take advantage of immediate tax savings and investment growth for your retirement. This should be a priority since the tax savings can be quite significant. For example, if your income is $50,000, a $5,000 RRSP contribution will save you $1,500 in taxes. That’s an immediate 30 percent benefit that you generate by making the RRSP contribution.

If you have children, now is a good time to open a Registered Education Savings Plan (RESP). The government provides a 20 percent grant on your contribution. The maximum grant you can collect is $500 per year, per child assuming you have contributed $2,500 into an RESP for each child. Since this provides you with a 20 per cent benefit, this should be your 2nd priority.

It’s also important to have an emergency fund for unforeseeable rainy days. Ensure you have three to six months of your monthly expenses set aside in a savings account or TFSA as an emergency fund. You never know when you’ll need it.

If you have dependents or a spouse, ensure you have the right insurance coverage in place. If anything happens to you or if you suffer any loss or damage, the right insurance coverage can ensure that your financial loss is limited. Speak with your insurance advisor for more details on the right coverage for you and your family.

In your 40s:

Continue to maximize your RRSP (Retirement Plan) and RESPs (Education Plan) if you have children every year.

Continue to pay down your mortgage within your pre-payment privilege options to avoid additional penalties.

Maximize your tax-free savings account and avoid personal debt.

In your 50s:

At this stage, retirement planning should be in full force. In addition to maximizing your RRSP, RESP (if your youngest child is under 18), and your TFSA, consider alternative investment vehicles to enhance your retirement savings. Alternatively, consider buying an investment property to boost your retirement income.

If you haven’t already done so, this is a good time to make an appointment with a financial planner to ensure that you’re on the right path to achieving your financial goals.

2. How do decisions we make about money in our 20s, 30s impact our 40s or 50s and beyond?

Debt and assets both compound. Be strict with expenses and spending habits early on to live a conservative yet comfortable life. I always like to remind my clients that typically, expenses never reduce, they only increase. It’s important to always have a budget that aligns with your goal-based financial plan.

3. When should we start a retirement saving plan and why do we need to start saving early?

The earlier you begin saving for retirement, the more you will have when you want to retire.

I advise my clients to begin saving for retirement in their 20s (depending on debt and other financial commitments). For example, contributing $100 per week into a TFSA, earning six per cent compounded annually, starting at the age of 25 will grow to approximately $867,544 by age 65. However, if you start this savings strategy at age 45 instead, this will grow to only $200,897.

Investments need time to grow. Do your part and give them the time they need to compound into something significant.

4. What are some good retirement saving plans? What are the differences between them and the benefits?

Check to see if your employer offers any savings plans. Many employers offer incentives to help you save for your retirement. It’s always a good idea to take advantage of these programs as they often provide you with money you wouldn’t have had otherwise.

Regardless of your employer’s offerings, it’s important to stay focused on your RRSP savings strategy:

  • Start your RRSP when you start working full time. RRSPs are a very powerful tool. Not only do you get a tax deduction on your current year’s income, but your investments also grow tax-deferred. Which means, as your investments earn income, you don’t pay tax in the year that you collect it.
  • Speak with your financial planner to determine which plan is best for you.

5. How would you suggest budgeting monthly salary?

A great rule of thumb is to pay yourself first. Save 20 percent of your net income (income after taxes and deductions) in any of the investment vehicles described above.

The trick is to keep your expenses minimal – easier said than done. Create a budget and stick with it. Once you pay yourself, determine your mandatory expenses (housing, tax, bills, heating, cooling, grocery, car, gas, etc.).

If you’re not able to save at least 20 per cent of your net income, you are living too lavishly beyond your means. Adjustments need to be made to your budget and spending habits.

I recommend any additional money be put into savings.

6. How can I maximize the benefits of my retirement plan?

Check what types of pension or savings plans your employer offers. Employers typically offer significant incentives to save using their plans. Max this out, its free money! Save it don’t spend it.

Invest in an RRSP to help save tax dollars today and to compound your retirement fund for the future.

7. What are some common mistakes that people usually make?

When you contribute to an RRSP, you get a bigger tax return, or pay less in income tax. It’s important to understand that this tax return is actually an “interest free loan” that has to be paid back to the government when you eventually withdraw the money out of your RRSP. What you do with the tax return will significantly impact your retirement position. Don’t spend it, it’s not your money. Re-contribute it back into your RRSP, pay down your mortgage, or contribute to your TFSA.

Ensure you have a financial planner who understands your unique situation and provides you with advice in many areas (tax planning, estate planning, investment planning, risk management, and/or financial planning for your kids).

These services can be invaluable and provide you with tailored investment advice so you can meet your financial goals.

8. Do you have any other advice that you want to share in terms of financial planning or retirement saving plans?

I like to encourage my clients to spend less and invest – it’s a motto I often go by. While life is unpredictable, it’s best to avoid personal and consumer debt.

It’s also important to set realistic and attainable goals. Whether you’re saving for a trip, down payment or retirement, having a clear understanding of what your financial goals are will help you achieve them.

By: Sanjeev Kapil

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