CAROLINE, Alta. – It’s never too early to start planning for retirement.
“Most people spend more time planning for their vacations than they do for their retirement,” said Al Bergsma, owner of Rocky Ridge Financial Inc. in Rocky Mountain House, Alta.
He told a recent farm seminar in Caroline that Canadians’ personal savings have dropped by about half a percent per year since the 1960s.
“If you multiply this over the last 50 years, that is the lowest rate since the 1930s.”
However, the median contribution to Registered Retirement Savings Plans has increased seven percent each year for the last three years. More than 75 percent of Canadians have a retirement savings plan, although they may not add much to it each year.
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On the liabilities side, average household debt is growing for every dollar of disposable income.
In 2005, the average household spent $1.05 for every dollar that came in, but in 2007 that increased to $1.14.
Financial planners say a household should have three to six months of emergency funds to cover the unexpected from a broken down furnace, high tuition bill or unemployment.
Bergsma advised people to plan before retirement to reduce debt.
“If that means cutting up a credit card, then do it,” he said.
Retirement planning should cover many factors because savings options are varied.
Many people opt for guaranteed investments. Money is locked in for a specific period with a guaranteed rate of return. These are stable, especially for those concerned about protecting the principle of an investment. The drawback is inflation could erode the investment value.
Mutual funds are also popular. The funds are diversified over a number of portfolios. They are convenient because of economies of scale and are easy to buy at financial institutions.
There is also a choice of what to invest in, and they can be cashed in easily.
“If your investments falls it is not a good time to sell,” Bergsma said. “Consider it like a house and wait until they go up again.”
Mutual fund buyers should ask for a prospectus and check on the investing company, what funds it deals in and past performance. Ask what fees and expenses are attached. Mutual funds are not sufficient for a short-term investment and they should not be used as an emergency fund, he said.
Other retirement income options include a Registered Retirement Income Fund. Investors must take out a minimum amount of money by December of the year they are 71.
There is no limit on the maximum withdrawal, but the money is taxable so it is advisable to take it out over a longer period.
Bergsma also advised retirees to consider setting up two income streams: one from the RRIF and one from another fund. Early retirement can also be accommodated with a RRIF.
A retiree should be able to manage on 70 percent of the gross pre-retirement income, he said.
