Retirement should be the time in your life when you’re finally stress-free, so the last thing you want is money management issues. Whether you’re planning to retire in a few decades or you’ve already submitted your notice, here’s how you can start financially preparing for your future today.
On this episode of Ratehub’s Real Money Talk Podcast, Tyler is joined with Senior SEO Content Specialist, Hyder Owainati, to discuss money management and retirement with David Trahair.
David is the author of The Procrastinator’s Guide to Retirement, a personal finance trainer, and a designated CPA. He shares his insight on how to prepare yourself financially ahead of time – even if you’ve been procrastinating.
Track your spending for retirement
David shares that tracking your personal spending is a habit everyone should get into. By tracking your spending, you’re looking at your past to make changes to your future accordingly.
“It's the best possible thing you could do for your personal finances because whatever you track, tends to improve.” For instance, if you notice that most of your finances go towards credit card debt, you’ll likely change your spending habits for the next month.
He suggests using Mint, an online tracker that tracks your spending habits after you link your banking information. However, for those that aren’t comfortable with sharing such details, you can also simply use a spreadsheet, and some banks even track spending automatically for its clients.
RRSP vs. TFSA vs. Mortgage
When preparing for retirement should you save using an RRSP, TFSA, or pay off your mortgage? David explains that there isn’t one right answer to this question – instead, it really depends on your end goal. Are you making long-term or short-term goals with your finances?
In terms of whether you should use an RRSP or a TFSA to save for retirement, David believes that an RRSP is usually the best option if you’re saving significantly ahead of time because of the way marginal tax rates work.
“RRSPs work well when you’re working, you got a good job, and you’re paying a good amount of taxes. You make the RRSP contribution – it’s tax deductible. You get whatever your marginal tax rate is back from your contribution. And then when you retire, you get to be in a lower bracket, and you’re paying less on the withdrawal.”
On the other hand, if your financial goals are short-term, a TFSA is probably the way to go. Let’s say you’re working a lower-income job as a fresh graduate and saving to purchase your first home in the next 10 years. By the time you save enough for your down payment, you’ll likely be in a higher tax bracket. In this case, RRSPs won’t work too well in your favour because you get taxed at the marginal rate when you withdraw the money.
David used to believe paying off a mortgage in full by the time you retire is the most important thing you can do. However, he has softened his perspective on this slightly because allocating all your funds to your home without saving can cause severe cash flow difficulties. He also brings up that because interest rates are so low lately, the advantage of paying off debt is far less than what it used to be.
Leveraging the stock market
Although you can easily beat the returns of an RRSP with the stock market, David emphasizes the risk factor involved. “Nobody knows what’s going to happen next. I don’t care how brilliant they are – they cannot tell you what’s going to happen next.”
That’s why it’s important to diversify your investments. One market crash or one wrong investment can ruin your finances, and most people can’t afford to lose it all. With investing, you need discipline to ensure your emotions don’t make any rash decisions for you. “When it crashes, everyone fears. And the worst thing you can do if you’re committed to the stock market is cash out when you panic.”
The market is also all about the time frame – how long will it be before you need that money for retirement? If you’re young, leveraging the stock market for your retirement fund is easier to do because you have time to let that money sit and grow. If you’re planning on retiring in the next year, however, placing all your money within the market can be extremely risky.
Emergency fund vs. line of credit
“I’ve never been a fan of an emergency fund because I hardly ever see anybody with anything in an emergency fund.” David explains that it’s not necessarily a bad thing, but the money can be allocated for other purposes, such as paying off credit card debt. And if you’ve paid off all your debt, leveraging an RRSP or TFSA can be a more efficient way to earn money.
On the other hand, a line of credit can be a good source for emergency finances. If you’ve been saving up and have sufficient funds in your RRSP before retirement, David recommends opening a HELOC (Home Equity Line of Credit) to provide you with a last resort in the event you run into cash flow difficulties.
Finding a financial advisor
“The whole key with respect to the person that’s handling your money is whether they have a conflict of interest or not.”
David explains if your financial advisor is only licensed to sell you mutual funds, this becomes a conflict of interest because they’re making a trailing commission that comes out of your return rate. Essentially, you’re paying for advice from someone that has the incentive of selling something that isn’t financially favourable for you. “We need to separate the cost of the product from the cost of the advice.”
On the other hand, most full service brokers use a remuneration method, meaning they get paid a percentage of the average amount in your portfolio. Because they’re getting a visible fee, they shouldn’t have you invested in mutual funds that provide them with a trailer fee – that’s illegal. Instead, they should have you exchanging traded funds, stocks, or bonds that don’t have a trailer fee involved.
However, David understands that not everyone can find the right person for the right cost. So an alternative option would be to find a fee-only financial advisor. These professionals charge a visible or set fee while most won’t handle your investments. Instead, they tell you what investment decisions to make, and you can do so with a discount brokerage yourself.
Robo-advisors are also a cheap option because a computer does the investing for you, instead of a human advisor. “For people just starting out, I think that’s a brilliant option to consider. The other advantage of that is most of them don’t have minimum account sizes” – meaning, you can start investing even with just a few dollars to spare.
Investing in GICs
David finds GICs favourable because they are generally a safe investment and easy to understand – the higher the interest rate, the better the return. And even if your GIC has a low interest rate, you won’t lose any money on it. He does, however, recommend staying away from market linked GICs because it over complicates what should be a safe and logical investment.
The ideal situation for retirement
Saving for retirement is all about balance. Being ultra-frugal, such as skipping out on vacations, isn’t necessarily the way to go as you may be depriving yourself of an optimized life. And of course, having piles of credit card debt can leave you with cash flow problems when you do choose to retire. “The best we can hope for is some sort of middle ground. If you're somewhere in the middle, that's about as good as it gets – don't worry about trying to be perfect.”
To hear the entire conversation on money management for retirement with Tyler, Hyder, and David, tune in to your favourite personal finance podcast in Canada, Real Money Talk. And be sure to check out David’s newest book release, The Procrastinator’s Guide to Retirement, for additional advice on the topic.