By Myron Genyk
Special to the Financial Independence Hub
The Canadian working population feels anxiety about retirement. Numerous surveys have shown that Canadians lack knowledge about how to save for retirement and stress about it. And for good reason – it’s difficult for someone with no personal finance background to know where or how to start. Canadian workers recognize that retirement investing is becoming increasingly important, as 75 per cent of Canadian employees believe there’s an emerging retirement crisis.
So how can you avoid your own retirement crisis? What do you need to do to get started? Generally, the first step is to open an investment account, and to do what is commonly referred to as “self-directed investing” or “DIY investing.” Once set up, here are five tips to ensure you are successfully investing for retirement:
1.) Start early
Compounded returns work their magic over longer periods of time, so it’s crucial to invest for retirement as early as possible.
For instance, if you invested $1,000 at age 25 and earned a return of 5.00% over 40 years, you would have $7,040 at age 65 (in today’s dollars). If you invested that same $1,000 at age 45, you would need to realize annual returns of 10.25% to have that same amount at age 65. This percentage only increases as you age. Starting early lowers your hurdle rates.
2.) Be consistent
Create a realistic savings plan. Whether it’s setting aside $20 or $200 of your paycheck, it’s important to set the amount and stick to it.
Avoid trying to time the market. So much has been written about how nobody can time markets; some people can be lucky over short periods, but nobody can do this consistently – not a fund manager, not your brother-in-law, not your neighbour.
You might also be enticed to put off saving for a couple of months, putting that money towards a vacation or something. Deviating from your savings plan could lead to forgetting to resume with your plan, or believing that you don’t need to continue with it.
3.) Keep fees low
Most people might not think much about a 1% or 2% difference in fees. After all, whether you tip 15% or 16% at your local breakfast diner might be the difference of a few dimes. However, when incurred over years and decades, these fees can substantially eat into your investment portfolio.
So, how do fees substantially eat into your portfolio, exactly? Let’s say you save and invest $5,000 each year over 40 years of working. A fee differential of just 1% could amount to a few hundred thousand dollars difference. By paying higher fees, it’s like you’re sharing your nest egg with someone else. Ensure your fees are low, and your future self will have so much more.
4.) Keep taxes low
Taxes can eat into your retirement nest egg much more than fees, but there are a couple easy ways to minimize your lifetime tax bill.
First, maximize any employer-provided pension or group RRSP contributions. Some larger employers may match employee contributions into pensions or group RRSPs. This is quite literally free money that is being offered to you – take it! These plans are also automatic – once set up, you don’t have to think about it – and portable – you can move your money should you change employers.
Second, open RRSP and TFSA investing accounts. They each offer different mechanisms to save on taxes, and you can hold all kinds of investments in these accounts, including low-fee diversified ETFs, well suited for long-term investing. For funds set aside for retirement, consider investing in an Evermore Retirement ETF, which offers global, diversified exposure to stocks and bonds, with market risk gradually decreasing over time, all at a low fee.
5.) Don’t get fancy
It can be tempting to shoot for the moon by playing the market and sinking money into some hot stock, a booming sector, or very speculative investments like cryptocurrencies. After all, your neighbour and brother-in-law are currently up huge on their investments!
Avoid the temptation. The history of investing is littered with burst bubbles. What quickly goes up almost certainly quickly goes down. Plus, by the time you hear about the next big thing, it’s usually too late.
A goal as big and important as retirement may feel insurmountable. It’s really as easy as starting early, keeping contributions consistent, minding the fees and taxes, and avoiding any hype.
One final piece of advice: share these tips with a friend who has yet to take the first steps in saving and investing for their retirement – you could make a huge difference in their future.
Myron Genyk is the Co-Founder and CEO of Evermore Capital, a Canadian asset management company that issued Canada’s first and only target date ETF series aimed at retirement, Evermore Retirement ETFs. With over 15 years of Bay Street experience, Myron is now focused on making retirement investing easy and accessible to all Canadians.
Commissions, management fees and expenses all may be associated with ETF investments. Please read the prospectus before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.