I'm sometimes asked by the media to comment on how much money Canadians should put into Registered Retirement Savings Plans (RRSPs). There isn't an easy answer -- but there is a better question: How much money do you need to retire comfortably?
RRSPs aren't the be-all, end-all, of retirement planning. They're a piece of the puzzle for many Canadians, thanks largely to the lure of the tax deductions that come with them. But to determine how much you need to contribute (if anything at all), look at the big picture. It's critical that you do this early and often: our research has found that roughly half of Canadian homeowners aged 50 and up believe they'll run out of money within 10 years of retiring. Want to avoid being in that position? Here are some questions to think about as you build your retirement plan:
What sources of income will you have in retirement?
Many Canadians can expect to qualify for some federal government benefits. These include the Canada Pension Plan (CPP), Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). The amounts you're eligible for (if any) can differ. The CPP, for example, is a monthly benefit that you've paid into through taxes that is designed to replace about 25 per cent of your lifetime pre-retirement employment earnings, up to a maximum amount (in 2013 this amount was $1,012.50, the average was just over $500 a month). Visit Service Canada to find out what you can expect to receive from government retirement plans and benefits.
Beyond government benefits, other potential sources of income include:
•Rental income (if you're a landlord)
•Royalties (from music or publications you've created)
•Dividends (from investments)
•Post-retirement work (such as contract, part-time and consulting opportunities)
Add everything up to get a sense of what your monthly income will be. Be conservative, as some of these income sources might not be guaranteed.
What kind of a lifestyle would you like to lead? Everyone has different dreams for their golden years. Do you want to travel the world, move closer to grandchildren, be members of the golf club, or regularly take part in your city's cultural offerings? Take the Investor Education Fund's Retirement lifestyle quiz to set your sights on life after the office. Once you have that in mind, take a look at our retirement planners on GetSmarterAboutMoney.ca, which can help you figure out the cost of living big or small -- including how projected inflation will make an impact.
What assets and debts will you bring into retirement?
Would you be willing to sell your home, downsize and use the difference to cushion your retirement? Alternatively, do you think you'll have lines of credit, a mortgage or other debts that will chip away at your income through monthly payments?
How soon would you like to retire and what's realistic?
To make the most of pension options, you might need to wait until you're at least 65. On the other hand, factors like health and capabilities might take you out of the workforce earlier. Use this retirement age and your potential life expectancy to calculate how many years you'll likely need covered. Some of the planners and calculators I mentioned above can help you estimate the costs of living. If the sum you need exceeds your projected income, you may need to adjust your date of retirement.
What kinds of investment risk are you willing to take?
When you take all of the factors into consideration -- your expected income sources, your assets and debts, and the amount of money you'd need to enjoy retirement until the end -- any differences left are what you'll need to fill with retirement savings (like an RRSP). While higher risk options have the potential to get you to your goals faster, there are no guarantees; you could also lose your money.
Get a sense of the amount of risk you're comfortable with -- and how you compare to other Canadians -- by completing the Canadian Money State of Mind Risk Survey. That, and the advice of a registered financial adviser or planner, can help you craft a plan that works for you.
6 Tips To Rescue Your RRSP From Volatile Markets
Have A Plan(01 of06)
Open Image ModalThe experts CBC News spoke to were unanimous on the need for a plan that takes volatility into account."I meet so many people who don't have an investment plan - who won't have an intentional allocation to bonds, stocks, cash," says Edmonton-based financial educator Jim Yih.Having a plan is one of the best ways to increase your probability of investment success in the long run, he says."It's hard not to pay attention to the swings," Yih acknowledges. But having an overall investment strategy and target asset mix makes it easier to avoid being caught up in the emotions of a plunging market.Sticking to that plan, of course, is a critical part of coping during the big slides. (credit:Alamy)
Risk Tolerance(02 of06)
Open Image ModalYih also says investors would be well advised to figure out their risk capacity - how much risk they need to take to reach their goals. This is not the same as the usual risk tolerance measures financial companies use, which he says "test how much risk you want to take."In addition to a financial plan, some advisers we talked to mentioned the importance of having an investment policy statement (IPS). This document determines how investment decisions are made."The IPS gives you your rules for managing your investments, and when you believe in your rules, you will be better able to manage your response to wild market swings," says Warren MacKenzie, CEO of Weigh House Investor Services.But he notes that an IPS still isn't offered by many financial advisers, so you may have to hunt around.David Chilton, author of The Wealthy Barber Returns, points out that people often think they can handle a lot of volatility - in other words, a lot of risk. That is, until the market actually undergoes a severe correction."Figuring out how much volatility you can stomach ahead of actually experiencing that volatility is an inexact process," he writes. "For most of us, it's less than we think." (credit:David G. Klein)
Revisit 'Buy And Hold'(03 of06)
Open Image ModalIs the investing concept of "buy and hold" through thick and thin really dead? Some advisers think it's time to at least revisit this familiar maxim."Buy and hold is a great strategy if you are in a bull market," Warren MacKenzie says. "But if we're in a secular bear market - and I believe we are - buy and hold is the worst strategy."Now is the time to hire a professional manager who can buy and sell to take advantage of that volatility, MacKenzie says."You must realize that to be a successful investor, you have to buy when the news is bad and when other investors are selling," he adds.Look at volatility as an opportunity to make money, MacKenzie says, because most people sell when the market drops and buy when it's near the top.Hiring someone to carry out your buying and selling also allows that third party to be the sober second thought your first impulse to panic needs - someone who isn't as emotionally involved with your money as you are. (credit:Alamy)
Buy On Dips(04 of06)
Open Image ModalSome advisers aren't quite willing to entirely write off the buy and hold philosophy, but do agree that market dips can uncover good quality stocks that have gone on sale."Volatility can represent a buying opportunity if the fundamentals are sound and the price has dropped," says Cherith Cayford, a principal with Victoria-based CMG Financial Education.Cayford isn't ready to declare buy and hold dead just yet. "It still makes sense for quality blue chip investments."But she adds that it's vital to have cash available for those market opportunities that dips can produce.The buying doesn't have to be an all-or-nothing process, either. Instead of biting off more than you may be able to chew, you can nibble - investing a portion of your cash when the investment drops to an attractive level. (credit:AP)
Seek Out Less Volatile Investments(05 of06)
Open Image ModalThere are plenty of other investments that historically don't tend to move as dramatically as the stock market as a whole. So don't be surprised if your adviser suggests an increased allocation to alternative products or asset classes to reduce the riskiness of your portfolio. Government bonds, for instance, tend to be much less volatile than equities. But be aware that even long-term government bonds aren't yielding much these days.Utilities, telecoms and real estate investment trusts (REITs) are all less volatile than the dominant TSX sectors of energy companies and financials, while still paying reasonably high dividends. Preferred shares also fall into this category. (credit:Getty)
Ignore The Daily News(06 of06)
Open Image ModalFor some investors who can't escape the daily litany of depressing economic stories, some advisers suggest that turning a blind eye to the latest swings may be the best coping strategy."Headlines can certainly be disconcerting," admits Marc Lamontagne. "You have to focus on your long-term goals.""In some cases, I have recommended clients stop opening their quarterly statements."This is, he points out, not a good long-term strategy for people who don't have a professional managing their investments.These days, the do-it-yourselfers need to pay even more attention. (credit:Alamy)