Who doesn’t want to retire rich? If you are a millennial with the same goal, we have two words for you - Retirement planning. Here are 6 tips to get you started on the road to retiring rich.
1. Prioritizing and Budgeting
Student loans and rising rents may be extremely overwhelming, making you feel like you can’t afford to save for retirement right now. However, by prioritizing retirement savings and creating a budget for yourself, you can end up with considerable retirement savings. Make smart spending choices right now so that you can lead a comfortable retirement life. Make budgeting a habit and it will get easier as the years pass.
2. Automate Savings
When there are too many bills to pay, you might procrastinate saving. You can avoid this by automating your savings as it will ensure that you save each month, even if you miss or forget about it. Your company will ensure your pretax dollars are moved from your paycheck and instead gets credited to your savings account automatically.
3. Boost Your Savings Each Year
A general rule of thumb states that you must save about 10% to 15% of your paycheck for retirement every month. It’s perfectly alright to save a little less than that but make sure you make that contribution every month without fail. Excuses like ‘I’ll wait till I start earning more’ and ‘I’ll catch up at the end of the year’ must be absolutely avoided.
As each year passes, you can consider increasing the amount of money being contributed to retirement savings. You can either increase your contribution whenever your pay is raised or if you make any extra income apart from your day job like freelancing or part-time gigs.
4. Educate Yourself on the Investment Options
Decide where you want to invest your money. Ideally, look for a low-fee service or automating the investments with low management expense ratios (MER). Remember that the fees can add up quickly and over the years, the investment lives will also add up to over six figures. Look at all the available options and educate yourself about them before investing in any of them.
5. Choose the Right Retirement Account
Before purchasing your first investment, you must decide the vehicle where you want to put your money. As a millennial in Canada, you must milk the benefits of tax-advantaged accounts like tax-free savings accounts (TFSA’s) or Registered Retirement Savings Plans (RRSP’s).
Both these accounts are a good choice, however, if your income is below $70,000 you should focus on maxing out the TFSA. As the name suggests, TFSA’s withdrawals are tax-free while withdrawals of RRSP are taxed as income. You can deposit and withdraw whenever you want, for any reason, if you have a TFSA account. This makes it ideal for big, one-time purchases. On the other hand, there are restricted deposits and withdrawals in case of RRSP. This account is ideal for basic and ongoing living expenses during retirement.
There are limits to the amount you can contribute to each of these accounts. Remember not to over-contribute, as it will mean you’ll end up paying a hefty tax penalty at the end of the year.
6. Invest in a Diversified Portfolio
Picking and choosing while investing may not be such a bright idea, rather, invest in a diversified portfolio. As a first-time investor, avoid individual stocks, as they will increase your risk. Well-diversified funds or exchange-traded funds (ETFs) are a great way to go for new investors since they decrease risk and keep the costs low.
Young Canadians can retire rich by also investing in quality dividend-growth names inside their TFSAs and reinvesting the dividends to let the power of compounding help them reach their savings goals.
Starting early makes all the difference. Don’t wait till you are older or more financially stable before you start saving for retirement. As a Canadian millennial, you can make your dream of retiring rich at a young age come true.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as Business.com, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday, and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email him at firstname.lastname@example.org or visit www.sdretirementplans.com.