Starting early may be the number one rule when it comes to saving for retirement, but if people aren’t living within their means, retirement may not come as early as they would like.
According to statistics released by Statistics Canada, Canadians are carrying a heavier debt load than ever before, says certified financial planner Bill Hyde of Millards Chartered Accountants.
“People are living beyond their means,” Hyde said. “(Canada’s) debt-to-income ratio has now reached 163.4 per cent.”
That percentage is at an all-time high in Canada, which Hyde suggests is largely due to easier access to credit coupled with low interest rates.
“I can remember a time when people didn’t have credit cards, only high-powered businessmen used them,” he recalled. “Now it is so easy to just pull out the plastic and go to town.”
Sitting down with a financial planner can help people be thriftier with their spending and save more money for their future needs.
In order to determine how much money will be required to live their dream retirement, it is wise for people to develop a plan.
“You have to have a picture of what you anticipate your retirement is going to be like and then break that down to how much it is going to cost,” Hyde said. “Not everybody wants to travel around the world and not everybody wants to live in a big house forever. It depends on what your plans are.”
By determining what kind of lifestyle they want in their retirement years, people can then start to determine how much they need to save to see their plan come to fruition.
“You need to carefully map out what it is you are looking for and then work backwards from there,” Hyde said. “Ask yourself how much money am I going to have to put aside a month in order to maintain that lifestyle? You can generally come back on some other sources of income in addition to your savings.”
Most people who have worked throughout their lives can count on receiving old age security during retirement.
“But once the income level goes beyond $67,000 a year, then (old age security) starts to get clawed back and then it doesn’t exist once your income goes above $110,000,” Hyde said. “Pretty much everybody who has been working is going to receive a Canada Pension Plan and there are ways of determining how much you are going to get out of that.”
Some people will also be able to add employee pensions to the pot, but with fewer employers offering pension plans, funds will likely need to come from other sources like savings and investments.
Ensuring you don’t overspend and keeping debt load to a minimum will also help.
“I don’t think anybody should have a mortgage after they are 40, that’s one of the top 10 signs you are living beyond your means,” Hyde said. “A CIBC survey found that today 17 per cent of people listed reducing debt as their number one priority and that’s a lot higher than it has been in the past.
“Seven per cent listed saving for retirement as their number one priority versus 13 per cent two years ago.”
About 48 per cent of people living in what Hyde dubs the “sandwich generation,” said having to provide for their children’s education was eating into their savings, with 36 per cent saying their savings were also being affected because they had to care for elderly parents.
Creating a realistic budget can help, Hyde said. But he advises people to be honest about spending habits and analyze whether money is being spent on things that are wanted or really needed.
An emergency fund that can be accessed when unforeseen circumstances like the loss of a job, sudden illness or an accident occur is another important part of a savings plan. About three months income should be set aside for such instances.
With careful budgeting and planning, a sound financial plan can help reduce debt and help people get back on track so they can live comfortably in retirement.