Category Archives: Retirement Saving

5 reasons not to contribute to your Retirement Plan

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5 reasons not to contribute to your Retirement PlanThere are 5 reasons not to contribute to your Retirement Plan, however always have a plan for how you will survive financially in retirement. Many people may find this amazing, but there are some good reasons why you should not contribute to your retirement fund in the opinion of the writer. Give it some thought and then make your own decision. You may also want to chat with some other people such as your family or your investment adviser or banker. It should be someone who will give you an unbiased opinion.

If you do not invest in your retirement because one or more of the reasons below apply to you, make sure that you solve these issues and then get started investing in your retirement. You do not want to end up retiring with no retirement fund. It is very important to save for retirement, but sometimes in the short term there are more important issues to resolve.

5 reasons not to contribute to your Retirement Plan or

No emergency fund.

Everyone should have an emergency fund to get you through those times when you are not working for any reason whether it is because you have been laid off or have health issues. An emergency may also include a major emergency repair, it may include a major health issue or some other thing that you really need to have an emergency fund for. Once you have at least 6 months of take home pay saved up, then you can look at some other issues such as retirement savings.

No match in contributions to your Retirement Plan from employer.

Many employers will match contributions as an additional benefit and also as an incentive for employees to save for their retirement. If your employer does this then you definitely want to take advantage of it. If they do not have such a program then there is no incentive to participate in this particular program other than perhaps convenience. However most advisers would recommend that you keep your retirement savings independent of your employer.

You are swimming in debt.

Paying off your debt especially high interest debt can save you a great deal of money. If your loan is 10% interest, then when you pay off this loan you are reducing the interest that you pay and effectively paying yourself 10% in interest savings. Right now you cannot even come close to that level of income on any investments that are safe enough for a retirement account.

You are afraid of future tax increases.

If you are expecting your income to rise over time, you may not want to avoid putting money in a retirement fund. This applies when withdraw it later and you are in a higher tax bracket. This probably does not apply to too many people.

High management fees.

Look for plans that have low management fees. If your current plan has a lot of management fees you may want to consider investing elsewhere . This is a decision that you need to discuss with your investment adviser.

Young People Should Save for Retirement

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Young People Should Save for RetirementApparently people  aged 18 to 34 who have retirement savings has dropped to 39 per cent – the lowest level in almost a decade – and fully 45 per cent have not started saving for retirement yet, according to a recent survey conducted in the past few months. Regardless of the age it seems that saving for retirement is either not a priority or consumers are struggling to meet their living expenses. Young people should save for retirement.

The graph above demonstrates how powerful early savings are and how much you can save if you begin early. We will talk about this subject even more in the next post,  Compound it – Why It Does Not Pay to Wait.

In fact retirement savings ranked seventh as a financial priority among younger people (26 per cent). The survey found that this age group is more focused on other financial goals such as reducing or eliminating debt (56 per cent), saving for a rainy day (45 per cent) and homeownership (44 per cent).

For most young people retirement is so far away and they feel that they are invincible, that saving for retirement really takes a low priority. The fact is that it takes a lot of money to be financially independent at retirement. You also do not know what life will throw at you over the years. Early retirement, forced retirement due to layoffs and all sorts of things could leave you without the funds in your retirement years. Young People Should Save for Retirement

What is the Solution to Saving for Retirement?

There is lots of advertising by all of the banks and financial institutions. However the bottom line is that individuals have to take responsibility for their own lives retirement. The best way is to form a habit of saving for retirement. Begin early when you have lots of time and the income can help you contribute to your retirement.

For example, if you took 10% of of your income and placed it into a tax free account to save for retirement.

Benefits

There are multiple benefits to this approach, which we will list as follows:

  • 10% is a relatively small amount and many people can afford to place 10% of their income in an account which they will not touch until retirement
  • Use a tax free account that allows you to deduct the contribution against your income, such as a 401k in the US or an RRSP in Canada. If you are in a 25% tax bracket, the actual cost is only going to be 7.5% approximately after taxes.
  • Form the habit of savings. Once you get used to saving and doing without this money, not only will you get used to not having it , many people do not even miss it.
  • Income is tax free within the tax free account and over 30 or 40 years this income can add quite substantially to your total savings if you begin early enough.
  • Health emergencies can occur and while consumers are urged not to touch their retirement savings for this purpose, in desperate situations the money is there to help with this expense.
  • Early retirement and layoff’s will also affect how much you can save for retirement. Starting early increases the odds of saving adequately for retirement.

There are lots of benefits when you think about saving for retirement. One significant benefit is just plain peace of mind. Knowing that you will not be broke when you retire or have to work into your seventies reduces a lot of stress. It provides many people with  comfort and reduced stress that also contributes to a healthy life.

Young People Should Save for Retirement Early

Starting early to save for retirement is painless. The savings will add up over the years and really amaze you. Place your saving in something that will grow and that is relatively conservative. This is your retirement. Although you have to time to recover from big losses, it is always better to invest in blue chip companies. Be diverse in your investments and monitor your investment at all times. Ensure that your retirement savings will be there when they are needed.

You Might Even Want to Retire Early

Another advantage of starting to save early for retirement is that you might even be able to retire earlier. In fact more and more people with sufficient savings and pensions are retiring early.  They can travel, volunteer, help with the grand kids and do whatever they feel is important to them.

Not only do you have peace of mind. You also have a lot more flexibility to make decisions about your life style.

Retire at 49 to pursue another career. Work on a new business. Or just going to the golf course can be a great motivator to save early for retirement. Set your goals now. Develop a plan regarding how you are going to achieve those goals for retirement. Click here for more ideas about saving for retirement.

 

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Kick Start Your Finances

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Kick Start Your FinancesNew Years’ is just around the corner and most people begin thinking about their new year’s resolutions. Kick Start Your Finances or we are going to try to lose some weight, quit smoking, or perhaps drink less or go on a vacation. These are all great things to consider, however, maybe we can add something more to this list. Maybe we can add getting our finances in order, perhaps saving for emergencies, that new car we have been thinking about, the kid’s college fund, and oh yes retirement which is many years away for some.

Kick Start Your Finances – Realistic Goals

Like all New Year’s resolutions, if they are not realistic, they probably will not happen. It is important to set realistic goals to help make sure that we can achieve them. Setting those goals should be based on our current financial situation and not some fictional wish list. The first step to setting these goals for the coming year should be based on a financial plan that summarizes your current assets, debts, cash flow, and income streams. Once you have that information, you can begin deciding what your priorities are and what goals you want to set for the coming year.

Pay Yourself First – Savings vs. Debt

Many banks and financial institutions talk about paying yourself first. What they really mean by that is to put money into a savings plan with them. Whether it is an RRSP in Canada or a 401k in the US, the banks want you to invest with them. You can also pay yourself first by paying off your debt so that you are paying less interest expense and ultimately when the debt is fully paid off, you have more cash to pay other things and save for the future.

Think Long Term – Retirement, College Funds, Mortgage

While you want to pay your debt off as quickly as possible, it is also smart to start thinking about the long term regardless of what age you may be. If you are young, setting a small amount aside for retirement every week can add up in a hurry and make you financially independent at retirement age. The same applies if you have young children. We want them to go to college and it takes a lot of money these days to put a child through college. Saving when they are young makes this also a lot easier as well.

Spending Less to Achieve Your Goals

You may find that initially at least you will have to spend less to achieve your goals in terms of saving money for college funds, debts, and retirement. But taking this step has huge benefits as you get older and close to retirement. It also means that you live within your income level and avoids debt increasing. This is important at any age even if you are retired today. Once you pay down your debt you will have more money at your disposal to pay for other things including your financial goals and other things that are part of your financial plan such as upgrading the house.

Peace of Mind

Are you one of those people who lie awake at night thinking about their finances? Once you have a plan there is nothing to think about. Focusing on implementing the plan provides a great deal of peace of mind and can eliminate those sleepless nights. A friend of mine who was retiring from a well-paid government job with a large pension did not know if he was going to have enough money in retirement. He worried a lot about this because he did not have a financial plan. He did not have a budget. They lived from paycheck to paycheck and often did not know how he was going to meet all of his obligations. The answer is pretty simple:

  • Develop a budget
  • Develop a financial plan
  • Pay down your debt as quickly as possible
  • Set aside money for retirement
  • Set aside money for emergencies
  • Save for special projects such as new cars and home renovations
  • Live within your means

New years is coming quickly. Have you made your new year’s resolutions? Even if you read this after New Year’s has long passed, now is the time to put this plan into action and obtain that peace of mind that everyone wants to have.

Not Saving Enough for Retirement!

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Not Saving Enough for RetirementA recent poll released by one of the big Canadian banks, CIBC, indicates that a large percentage of Canadians are not financially prepared for their retirement! This may come as a surprise to many people in the US who have the impression that Canadians are conservative savers and have a sound banking system. We may have the banking system but many of us have not taken advantage of everything we should have done over the years and now face a retirement that is going to be less than what we thought or planned for.

Not Saving Enough for Retirement

Key findings of the poll by CIBC include: 44 percent of all Canadians say they are not financially prepared for their retirement. Also among Baby boomers at the leading edge of the boom (aged 55-64), 31 percent say they do not feel financially prepared for retirement. Are Americans in a similar situation? Most likely and probably worse if you listen to all of the news reports!

Having a Plan Improves Your Optimism

A lot of people have their heads in the sand because they are afraid to find out just how bad their situation is relative to retirement. They are afraid of what a plan will tell them so they simply do not want to know. The reality is actually far from the truth. Although your situation may not be great, finding out exactly where you are at financially with respect to retirement can be enlightening and helpful. At the very minimum, you will find out exactly what you need to do to get into a better place with respect to saving enough for retirement.

The same poll by CIBC found that among Canadians who say they have a long-term investment plan for retirement, 76 percent say they are financially prepared for retirement, versus just 25 percent among those who don’t have a plan. That is very significant! Having a plan lets you set goals to help you get to were you need to be financially and helps you meet those goals as well

Plan all Year Long, Not just at Tax Time

Reviewing your plan at tax time is better than not having a plan at all. However, you really should sit down with your spouse. Review your retirement plan several times a year. Update assumptions about your retirement. If there are changes update your plan with current values so that you are never surprised. Another advantage of updating your plan several times a year is that you can make decisions immediately. Increase savings for retirement during the year instead of at the end of the year when you have lots of other expenses.

Continuing to work during Retirement

This same poll by CIBC indicated that fully 69 % of Canadians who are at the age of 65 or older plan to continue working during retirement. Boomers younger than 65 appear to have accepted the reality that they will need to work past 65 to maintain the lifestyle they need for retirement. If they have not saved enough for retirement, this is really the only option they have.

If you are not yet 65 or have retired, now is the time to complete an assessment of your finances. Take steps to at least make your retirement as comfortable as possible. Here are a couple of steps to take if you feel that you are not saving enough for retirement or do not know if you have enough for retirement.

  • Meet with an Adviser
  • Build your plan or Review your Retirement Strategy
  • Contribute regularly to a retirement savings plan:
  • Manage and Track Day to Day Spending against a budget
  • Prepare for the Unexpected i.e. have an emergency fund

Not Saving Enough for Retirement: Get Active Today

The steps above are pretty basic and easy to follow with the help of an adviser.  Are you are laying in bed awake at night losing sleep? Will be ok financially in retirement. Take action now and get started. List all of your assets of every kind. List all of your anticipated income from all sources. Assemble all of your day to day budgeted expenses and finally include any special expenses you may have. This includes major repairs to the house, a new car, travel, and also health-related issues.

Once you have this information together, talk to a financial adviser. Speak to one, who is willing to help you answer the questions you have. Of course, in return, he or she is going to want you to place your investments with him. This is ok, provided you are getting the assistance you need. Any adviser who is only interested in helping you with investments is not really an adviser. Instead, they are only interested in how much money they can make and not really helping you!

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Extreme Savers

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Extreme SaversWhat are extreme savers? Every once in and while you run across people who really seem to have their act together when it comes to saving money, while others just seem to squander it and are always running short. These people could be called extreme savers or perhaps they just make efficient use of their money. We know of people with two incomes, who never seem to have any savings.

Yet they freely spend their money on new cars, dinner out all of the time and lots of material things. They seem to have a lot, they throw out a lot of stuff and seem to be really enjoying life. Try talking to them about retirement and the answer is that they cannot even consider retirement until they are 65 at least. Sometimes they even run short of cash before payday.

Extreme Savers – Retire Early

While the extreme savers are looking at retiring at 50 or 55 at the latest. Remember the freedom 55 advertisements. We do not see much of that anymore after the severe recession we have just been through, yet there are people who can and do afford to retire early and have done so on their own without any outside help or huge inheritance. Just how do they manage to accomplish such a feat, while raising a family, buying a car, a house, and all of the other things that go along with living the lifestyle of an affluent person in North America?

It seems that the basic philosophy is to pay cash for everything and not to purchase anything until you have saved sufficient funds to pay for what you wish to purchase. Can it be that simple? Most people today carry multiple credit cards, they have a loan for their car and a mortgage on their home. if they are lucky that is all they have, yet they pay thousands of dollars in interest on these items, while an extreme saver manages to save all of this interest by paying cash for everything. With all of this extra money, not only do things they want to buy cost less, they can save even more money.

Some Examples

A few examples will easily demonstrate what a difference it makes. Let’s assume that you have a car loan. The bank or loan company is usually obligated to tell you by law, how much you pay in interest over the life of the car loan. For most situations at current interest rates, this can amount to several thousand dollars which you tack onto the price of the car. For a car valued at $35 thousand with a loan over 4 years, this extra cost in the form of interest might add up to over four thousand dollars. Imagine if you had that money and wanted to just save it! Now you are earning interest on the money you saved. It just continues to compound and your savings add up quickly.

Extreme Savers – Examples

I recently read an article about a family who had a nice home, two older cars all paid for, they had raised two kids who were now in university, and combined they had savings over two million dollars saved for retirement! They were in their early 50’s and had medium-level jobs. How did they amass such a fortune?

According to them, it was pretty simple. They just lived reasonably, paid cash for everything, and only bought things when they needed to. They did without if they did not have the cash to pay for something. Now you might say that they were so frugal that they and their kids were missing out on life, in fact even depriving their children of a normal childhood. Well, it could not be further from the truth.

Maybe they did not have the latest model cars every year, maybe they did not have the latest electronic gadgets at the same time everyone else did, and maybe they did not go on expensive trips like everyone else in their neighborhoods have done. However they do have two cars, they do go on trips and they do purchase electronic gadgets after the prices have declined. Instead of being early adopters, they are fast followers, buying a flat-screen TV for example after the prices have dropped from the thousands to around $500. A perfect example is that you can buy a 3D TV now for several thousand dollars. Wait a year or two and they will be down to around a thousand, more affordable, and more features.

Summary

Anyway, you get the point, which we will summarize in case you missed a few:

  • Pay cash for everything
  • Be a fast follower rather than an early adopter
  • Do without until you can afford it
  • Save as much as 50% of your income for retirement
  • Live within your means
  • Plan for the long term so that your retirement years are comfortable
  • Invest wisely
  • Diversify your investments

Hopefully, this post has given you some ideas about how to become independently wealthy, become an extreme saver and yet be able to enjoy life and all that is has to offer. Having a nice nest egg or retirement fund gives you a lot of independence and just maybe you can retire early instead of working until you are 65 or older.

Feel free to add your comments about extreme savers or retiring early. However we delete spam comments, so make sure they are adding some value to this post so that our readers can benefit. Good luck with your savings plans!