Saving What You’ll Need Later
People are always asking me what they should be investing in. I don’t know. Get yourself a financial advisor. I have one and he helps me decide how to allocate my money to suit my needs.
Of course, there are some basic things I can tell you about saving.
If you aren’t taking full advantage of a Registered Retirement Savings Plan, you should be. Save $1,000 a year for 30 years at 6%, and you’ll end up with over $79,000. Save $5,000 a year and you’ll have five times that – almost $400,000 – come retirement time.
So how much should you save? That depends on how much income you think you’ll need when you retire and how long you’ll live in retirement. If after you account for government benefits and your corporate pension plan (if you have one), you find you’ll need an income of about $30,000 from your savings, you’ll have to save about $400,000 if you want your savings to last 15 years. Need your money to last 20 years? Then you’ll have to save almost $550,000.
If you’re passing up the Canada Education Savings Grant, you’re a dope. When you put money into a Registered Education Savings Plan, the government gives you money to help with your child’s education. If you put $2,500 in the plan for Little Susie, the Feds will add $500. That’s an immediate 20% return. Why would you pass that up?
If you’re earning a pittance on your savings account, shame on you. There are options available that will pay a decent return, so don’t settle for what your silly old bank is offering, if it isn’t competitive. You can set up an automatic debit so that money is taken from your chequing account each week or month. Whoosh! It’s gone. And you won’t even miss it. And now it’s working harder for you. Yeah! Look here for the latest savings rates.
Saving money on mortgage interest is as easy as choosing to make accelerated payments on your mortgage. When you do, you make the equivalent of one extra monthly payment, which could save you four year’s worth of interest! Wow!
Saving on your car insurance by increasing your deductible. Would you really make a claim on your car insurance for under $2,000? Are you nuts? Do you know what that’d do to your premiums? So raise your deductible to $2K and then stick the difference in the bank until you’ve saved your deductible. Then roll the difference into your RRSP.
Plan to save $5,000 a year in the new Tax-Free Savings Account. Do it for twenty years earning just 4% and you’ll end up with just less than $150,000 in tax-free money – that’s $16,000 more than you’d have if you were paying tax at a marginal tax rate of 31%. The gold medal to the first guys off the mark offering the new TFSA goes to ING DIRECT. Anybody surprised? While you’re on their site, make sure you read their Top 10 Things to Know about the TFSA.
July 14th, 2008 at 1:03 pm
I am looking forward to the TFSA and it was good to read the 10 top things and good to know I have taken advantage of some of the things you mention. I couldn’t believe the RESP and the grants my grandchildren will get because of it. Now that I have my 5th (and they say final) grandchild, I can start the final RESP and move on an even keel (hopefully) to successful saving for them.
July 14th, 2008 at 11:51 pm
I increased the deductable on my house insurance, it saved a bundle! (I am applying to my emergency savings, of course) Am I really going to complain about paying the first $5000 if my home and contents are lost to some tragedy? I think not!
The whole savings thing still terrifyies me. We have no pensions, the daily grind and little emergencies seem to sap the disposable income too quickly for a really motivated savings regime…. we have a pre-auth withdraw for $200/mo. I KNOW it’s not enough, and I KNOW that the earlier I save the longer it can work for me. (I don’t have any debt but my mortgage and less than 10 years left on that.) The only thing I can salve my fear with is that I slap down lump sums from time to time. In the back of my head I hear, “It’s not enough, it’s just not enough”.
July 15th, 2008 at 11:44 am
Tracey, I think you’re doing great. I think you’re being hard on yourself. The retirement planners I think scare us a fair amount about saving for retirement with statements like “replace 70% of your income.” Reality is that for most people, once mortgage is removed, kids expenses are history (including resp payments) and also no more saving for retirement, most people can live exactly the same way they did before on 50% of income. And don’t forget, for a couple the first ~ $23,000 is kicked in by the government if you’ve worked in canada your whole life.
July 15th, 2008 at 12:11 pm
“And don’t forget, for a couple the first ~ $23,000 is kicked in by the government if you’ve worked in canada your whole life.” -
If the Canada Pension Plan is still around by the time we retire. I’m not counting on it - it will be a bonus if it is.
I also have that “it’s not enough feeling - but we keep plugging away at it and try to stay focused and on track. Difficult at times.
July 16th, 2008 at 9:04 am
It is a virtual certainty that the CPP will be. There was a time when the pundits said it would run out around 2015, but the government did a good job of changing the formula for how much it collects in the late 1990s and now it actually earns far more than it pays out and more importantly collects far more than it has to. Now as long as Canada / government / civilization exists 50 years from now so will CPP. (ie if everything goes Mad Max style, all bets are off).