Good Morning Everyone.  It’s time for another post in our Retirement Planning For Young 20 Something Investors series.  As a Financial Planner I am often asked the question how much should I save for retirement? The honest response is that there is no easy answer.  Retirement is different for everyone, and depends on our personal situation.

How Much Should I Save for Retirement?

How much we should save for retirement depends on our pre retirement income as well as the lifestyle that we wish to maintain during retirement.  The retirement needs of someone who is mortgage free are different from someone who retires with a mortgage on their home.  The retirement needs of someone who plans to fund their grand children’s education is completely different from someone who has no financial dependents.

There are two very basic financial principals that apply to anyone who is saving for or planning their retirement.  In order to save for retirement we must Create Our Investment Portfolio as well as Start Planning for Retirement Early.   If we choose the right investments and we start saving at an early age, we are already on the right financial track towards saving for our retirement.

Retirement savings are an important part of our retirement goals.  We can determine how much we need to save for retirement by using a 401k Calculator.  In general our retirement income should be approximately 70% of our pre retirement income.  Using a 401k Calculator can help us determine the future value of our investments, as well as how much we need to save now for our future retirement.

Easy Strategies to Help Save for Retirement

The easiest way to save for our retirement is through pre authorized contributions.  This allows us to contribution a fixed amount (the minimum is usually $25) into our 401k or retirement savings plan on a regular basis.  A pre authorized contribution withdrawals money from our bank account and deposits the money into our retirement savings account.  It is an automatic transfer at the frequency that we choose, such as biweekly or monthly.

Another easy way to save for our retirement is to invest our year end or quarterly bonus directly into our 401k or our retirement savings account.  This guarantees that we will keep continuously saving throughout the years.

Retirement Planning and 401k Calculators

Many financial institutions offer a variety of 401k calculators to help clients save for retirement:

Chase Bank offers the Chase Retirement Calculator to help us work towards our retirement goals.  The Chase Retirement Calculator is complete with retirement goals, investment and savings strategies, calculations, as well as suggestions on the next steps and plan of action.

Mint is budget software that allows us to work towards various financial goals which include retirement.  We can import our current retirement savings account information from our financial institution directly to Mint and they will keep us updated on the progress of our retirement goals.

HSBC tells us that It’s Time to Prepare for The Future of Retirement.  Their website offers many helpful links for all types of retirement lifestyles such as living abroad, planning early retirement, evaluating our retirement needs, and downsizing our home.  The HSBC retirement process is done in three steps which include Planning for Retirement, Approaching Retirement, as well as Living in Retirement.

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The Role of a Financial Planner is to assist us transition smoothly between our different financial life stages while maintaining focus on our various financial goals.  Honesty and Open Communication are two very important qualities in a good financial planner, as well as having a very strong knowledge of products and the financial services industry.

It is very important to be completely honest with our financial planner because it is their role to provide professional financial advice on our entire financial situation, not only our assets with their financial institution.  Although financial planners do have annual sales objectives, their primary role is to manage client relationships.

The main role of most financial planners is to assist clients with their investment and retirement needs. This also includes Estate Planning and Tax Planning.  It is important to consult with a financial planner to make sure that our investment and retirement goals are attainable with a professional financial plan.

The role of a financial planner is to assist us to start planning for our retirement in our 20s, and make sure that we stay on the right track over the years to come.  We should maintain regular contact with our financial planner throughout the year and meet with them in person at least once a year.  Regular communication with our financial planner ensures that we remain focused on our financial goals as well as stay on track for our retirement plan.

Between the age of 20 and the age of retirement we can have many other financial goals which may include paying off debts, buying a car, travelling the world, as well as buying a home.  The role of a financial planner is to help us achieve as many of our financial goals as possible.  If we have a financial or retirement goal that is unrealistic, it is also the financial planner’s role to tell us that certain financial goals may not be attainable. The Financial Planner role is like a psychic, we have to accept the good with the bad.

One of the benefits of the financial planner role is that we offer our clients comprehensive or simplified financial plans. A financial plan is a clear picture of our current financial situation presented with our path to achieve our various financial goals throughout the years.  As our information changes over the years, our financial plan will need to be updated to always remain current.

A simplified financial plan focuses on one or two specific goals; while a comprehensive financial plan focuses on our entire financial situation, which also includes managing our money after we have passed away.  The financial planner role does not cease upon death.  Very often a financial planner will take part in the estate process.  The relationship between a financial planner and their clients usually extends to a family relationship that includes immediate as well as extended family.  After the head of household passes away the financial planner role extends to the family and continues to manage money for the family.

The role of a financial planner and our relationship with a financial planner are crucial for determining, working toward, and achieving all of our investment, retirement, and financial goals. Most major financial institutions offer financial planning services free of charge for their clients.

Photo by D’Arcy Norman

Good Morning Everyone!  Welcome to the second post in our new investment series Retirement Planning for Young 20 Something Investors. Planning for retirement is a great investment strategy, but it only works efficiently if we have a retirement plan.

A good retirement plan takes into consideration our current age, the number of years that we need to invest, as well as our target retirement age.  Investing for the long term is a great retirement strategy because it takes advantage of The Compound Effect.  This is the concept of earning interest on top of previously earned interest.  However, none of this information matters if we don’t know how much income we will need to live comfortably during our retirement years.

How Much Do I Need to Retire?

How much we need to retire usually depends on our lifestyle before retirement.  Financial Planners usually consider 60% to 80% of a person’s pre retirement income to be the amount of income they will need to live comfortably during retirement.  Of course this always depends on a person’s ability to save before retirement as well as their future retirement needs.

The days of people retiring mortgage free and without personal consumer debt are over.  The truth of the matter is that people upgrade their homes, buy a second home, and move several times throughout their lives.  All of these events can prolong the life of a mortgage.  The concept of buying a house at 30 years old and amortizing it over 25 years so that it is paid off when we retire at 55 is definitely in the past.

I would say that 70% to 75% of a person’s pre retirement income is ideally what they will need to live comfortably during retirement.  80% could be very high and depends on someone’s financial obligations, and 60% is very low and depends on someone’s ability to save.  Once we determine how much money we will need to live comfortably during our retirement, the next step is to determine where our retirement income will from.

Our primary source of income during retirement will come from Social Security in the US, and the Canada (or Quebec) Pension Plan in Canada.  These government funded retirement pension plans are our primary source of income because they are mandatory.  Our second source of retirement income should be our employer pension plan, if we are fortunate enough to have one.  If these two pension plans do not provide enough income during retirement we will then have to fund our retirement income from our own personal savings.  This includes both our registered retirement savings plans as well as our non registered investment accounts.

If we can determine our target retirement age, the number of years until retirement, and where the retirement income is coming from, we will know how much we need to saving for our retirement years.

Life Expectancy Calculator

Our retirement years are the number of years from the date we retire from our job to the date that we “retire for the final time” aka pass away.  As a general rule of thumb Financial Planners use 90 years old as the average life expectancy.  However, my Great Grandmother lived until she was 104 and my Grandfather passed away at 78…so who really knows?

I like to think that Saving for Retirement is Like Eating Chocolate.  It is a personal preference and depends on our personal (financial) taste.  If our family has a history of fatal disease, or we have been diagnosed with a life threatening disease, of course our life expectancy age can be reduced as needed.  The reason that Financial Planners use 90 as an average life expectancy age is because it’s better to be conservative and have money left over upon death, rather than being too aggressive and spend all of our retirement savings too early.

Retirement Calculators

Many financial institutions offer retirement planning tools such as various retirement calculators that can help us determine the amount that we need to save now to have a comfortable retirement in our future.  Check out these retirement calculators:

Merrill Edge offers a retirement calculator called our Personal Retirement Number.

Chase offers the Chase Retirement Calculator to help us determine if our current retirement assets will be enough to meet our unique retirement goals.

RBC Royal Bank offers an RSP-Matic Calculator that shows how contributing on a biweekly or monthly basis can really add up for our retirement.  They also offer an RRSP Future Value Calculator that tells us how much today’s savings will be worth in the future.

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Good Monday Morning Green Panda Tree House Readers! I hope you all had a nice weekend.  Today we are starting a new Investing Series on Green Panda called Retirement Planning for Young 20 Something Investors.  We are going to start our week off on the right financial foot by discussing our financial futures.  Retirement Planning 101 tells us that investing for our retirement is for the long term.  One of the benefits of investing for the long term is the compound interest effect.

What is the Compound Effect?

In a nutshell the Compound Effect is the benefit of earning interest on interest.  Whether we are earning our rate of return as interest, dividends, or capital gains as long as we allow them to be reinvested in the investment account, we will benefit from the compound effect.

If we invest $1000, and we earn $50 of interest on our investment the first year, and we let the $50 of interest reinvest with our original investment of $1000 we will earn interest on $1050 in the second year.  This is the benefit of the Compound Effect; we will continue to earn interest on our compounded (reinvested) interest every year.  The Compound Effect allows are money to grow faster over the long term.

How does the Compound Effect Grow Our Money?

Let’s use the same example as above, let’s say that we invest $1000 at an interest rate of 5% for 25 years.  If we have our interest paid out to us every year we will receive the exact same amount of $50 interest each year, because our 5% interest will always be calculated on our original investment of $1000.  This will give us a total amount of $1250 in interest for the 25 years. Without the compound effect our original investment of $1000 will be worth $2250 in 25 years.

If we allow the 5% interest to reinvest every year and we take advantage of the benefit of the Compound Effect our original investment of $1000 will be worth $3386 in 25 years.  Allowing our interest, dividends, or capital gains to reinvest over the years is definitely beneficial for our investment growth.  The Compound Effect is definitely a beneficial investment strategy that all young investors should take advantage of.

Does the Compound Effect Affect My Taxes?

The Compound Effect does not affect our annual personal income tax return.  Whether we choose to have our investment returns (interest, dividends, or capital gains) paid out to us, or whether we choose to reinvest our returns and allow them compound, we will still receive a tax slip at the end of the year.  Whether or not we allow our investment returns to compound we will always have to pay tax on any investment gains at the end of the year.

Most investments such as Guaranteed Investment Certificates (GICs) as well as Mutual Fund Investment Accounts always suggest that we allow our investment returns to compound.  If we want our investment gains paid out on a monthly, quarterly, or annual basis we will have to specify our investment instructions to our financial institution.  The default for interest, dividend investing, and capital gains is usually to allow them to reinvest and take advantage of the compound effect.

Happy Tuesday Morning Green Panda Friends.  I hope that Monday wasn’t too hard on everybody; I know it was a holiday for some!  I am personally not a big fan of Monday mornings. Almost every single Monday morning when my alarm goes off I think to myself… When can I retire?

Our Canada Pension Plan will be a major source of income when we are ready to retire.  If you regularly monitor your weekly, biweekly, or monthly paycheque you may notice an amount that is being withdrawn from your gross income for the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP).

According to Service Canada  the Canada Pension Plan will provide us “with a stable and dependable pension (we) can build on for retirement.  (Our) contributions also provide (us) and (our) dependents with basic financial protection if (we) become disabled or die.”

Who can receive Canada Pension Plan Benefits?

There are conditions and restrictions regarding who can benefit from the Canada Pension Plan. According to the Retirement Income Options resource center from TD Canada Trust, only people who have contributed into the CPP/QPP during their years of employment can benefit from the CPP/QPP during retirement.  The amount that we will receive depends on the number of years we worked, as well as the amount of money that we contributed into the CPP/QPP over those years. The current maximum CPP/QPP benefit is $863.75 per month.

When can I start receiving the Canada Pension Plan Benefits?

If we are eligible, we (or our parents) can start receiving full Canada Pension Plan Benefits at the age of 65. Alternatively we can start receiving Canada Pension Plan Benefits starting at the age of 60, although a penalty will apply.  If we decide to start receiving Canada Pension Plan Benefits early we will have a penalty of 6% annually, which equals a 0.5% reduction for every month that we choose to receive our benefits before the age of 65.  In a nutshell, we will lose 30% of our total Canada Pension Plan Benefit if we start to receive the money at age 60 instead of 65.

Will the Canada Pension Plan be available when I retire?

In recent years as the baby boomer generation retires and starts to collect their benefits there has been some controversy over the sustainability of the Canada Pension Plan.  People are questioning whether or not there will be any money left in the Canada Pension Plan for the younger generations to benefit from in our retirement.   Recent changes to the Canada Pension Plan “will ensure that the CPP remains fair and sustainable.”

The benefits of the Canada Pension Plan are usually not a sufficient source of income during retirement.  As young investors we should also save for retirement through our personal Retirement Savings Plan (RRSP,) as well as in a private pension plan with our employer.  These savings combined with the benefits of the Canada Pension Plan will create a stable income for investors during retirement.

This is the 6^th and last post in our My First Portfolio series, I hope you enjoyed it.  Other topics that we have discussed during this series are Stocks, Dividends, Exchange Traded Funds, It’s Time To Start Investing, and 5 Steps To Create Your Investment Portfolio .  Please contact Green Panda anytime with questions about your retirement and/or investments.