If you are a Canadian close to retirement, and don’t have a defined-benefit or defined-contribution pension plan, you will need to carefully consider how you will support yourself in retirement.
There are a number of reasons why people may not have a defined benefit pension plan, such as:
- You are not entitled to one;
- You work for a company that does not offer defined benefit pension plans;
- You have chosen not to participate in the plan offered by your employer.
If you fall into one of these categories, you should start planning ways to generate income to supplement your retirement income. While it is possible to save enough money in a Registered Retirement Savings Plan (RRSP) or a Tax Free Savings Account (TFSA) to support your retirement, over the years you would have missed out on the opportunity to invest in other assets that could have generated growth.
1. Start a Tax-Free Savings Account (TFSA)
A TFSA is a great way to build up a nest egg. It’s simple to do: you open up an account at your bank, deposit money, and then the interest you earn on that money is totally tax free. That means you can take that money out of the account and put it towards a house, or you can deposit it in your RRSP or maybe even a non-registered investment account. With a TFSA you’ll never pay tax on the money again, no matter what you do with it!
To make the most of your TFSA, utilize the maximum amount that you can contribute to your TFSA this year, plus any unused contribution room from previous years. You can even carry over unused contributions for up to five years.
2. Cut expenses and consolidate debt
Start taking control of your finances by spending less than you earn and paying down high interest debt. For example, if your company matches contributions to your RRSP up to a certain percentage, contribute enough to get that match. Then use that extra cash to pay off debt like student loans or credit cards. Not only will you be able to save on interest payments, but you’ll also be decreasing your overall debt load.
3. Start planning for retirement now
It’s never too soon to start planning for retirement, especially if the company where you work doesn’t offer a defined-benefit pension (i.e., they don’t promise a certain amount of money upon retirement). If you work for yourself, then start contributing to your own RRSP right away. And if you have access to a group RRSP through your job, start contributing as much as possible now so that it’s there for when you need it (but don’t over contribute!).
4. Keep saving and investing
Once you get a handle on your cash flow and are able to save regularly, start investing some of that money in a portfolio that suits your needs and risk tolerance. If you have other assets like property or other investment income then consider using them as part of your diversification strategy along with stocks and bonds. Then continue saving and investing for the rest of your life so that you can take full advantage of compound interest!
Unsure what to do next?
The team at Pension Solutions Canada is here to help you! We can assist with helping you plan for retirement, as well as estate planning, address tax minimization, and answer all of your retirement questions. Our services are no cost to you. Call us at 1-888-554-6661 to get started.
