At any stage of life it is important to have a savings plan; whether for a future purchase, as an emergency fund, or for retirement.
Matthew Ehrenreich is an associate of McIver Capital Management at the wealth management firm Richardson GMP Limited in downtown Vancouver. While he and his team tend to cater to high net-worth clients, one common factor he has noticed for individuals at any income level is the desire to be prepared for their future.
When it comes to saving, consider life as having many different stages.
The Accumulation phase: mid-to-late 20s to mid-to-late 30s, when people have the chance to start putting their first bit of money away. This phase is often overlooked as an opportune stage to begin saving, because people are busy starting a family, buying a house or car, and getting into the rhythm of a full-time job.
The Mature Earning phase: age 40 to 55, when people have begun to mature in their careers and earn substantially more. They often have kids who are participating in various activities and who will potentially need assistance with saving for their post-secondary education. It’s a time when there is a greater temptation to spend more money in conjunction with the increased household income, whether its wanting to upgrade to a nicer house, a better car, or taking more vacations.
“At this stage, if people haven’t already developed a sound habit of putting away a little chunk of their income on a consistent basis, it will only become significantly more difficult to get in the habit as the stages of life continue,” says Ehrenreich. “The key is to have developed a small amount of savings by this stage already, that you can continue to add to month after month as you approach the third stage.”
The Peak Earning years: Age 55 to 65, which in most cases is the final decade of work for many people. At this point they have spent the majority of their lives in the workforce and are in the process of reaching their potential. If health permits, these will be the years when people make the most money and also begin to think about life after the workplace. For too many families today, it isn’t until this phase that they begin to realize what the costs of retirement will be.
A recent CIBC poll found that 45 per cent of people aged 50 to 59 have saved less than $100,000. Given that the average retired person in Canada now spends approximately $51,000 a year, it’s clear to see that people are grossly underestimating the costs required to live a sustainable life upon retirement. With life expectancy increasing, in many cases, people will need to fund up to 20 years of retirement living, meaning that people need to begin putting away money sooner.
A Canadian Payroll Association survey found that 40 per cent of people spend all, or more, of their paycheque.
“This is simply unacceptable,” says Ehrenreich, who advises putting away 10 to 20 per cent, at minimum, of every paycheque into savings. Along with this, he has other tips when it comes to money management and where to invest for retirement.
Tax Free Savings Account (TFSA): this is the best savings tool available for Canadians, where you can grow money without being taxed, even on withdrawals, and yet far too many do not take advantage of it. It began in 2009 and at this point, Canadians have up to $36,500 available in total contribution room.
Registered Retirement Savings Plan (RRSP): this is an effective way to save for retirement and reduce current taxes. Money grows within it tax-free, much like a TFSA, however, when you withdraw funds you do have to pay taxes, which makes this a more long-term plan for retirement.
Have an emergency fund: Have enough cash in a bank account to cover three months worth of expenses. If you ever lose a job or face a crisis, this will allow a buffer zone that prevents you from having to dip into your savings.
Setting up an automatic electronic monthly contribution to a savings account is a simple way to start. Establish a difference between needs and wants and cut back on unnecessary spending.
“Every individual’s circumstances are different, which is why it’s important to actually sit down with someone and discuss future goals and expectations for retirement and all of life’s stages,” says Ehrenreich.
“With good habits and dedication, financial freedom can be achieved and people can live the kind of lives they want after retirement; it all starts with a plan.”
Matthew Ehrenreich is an associate of McIver Capital Management at the wealth management firm Richardson GMP Limited in downtown Vancouver.