When should I start planning for retirement?

If you're just starting out in your career, retirement can seem like something so far off that it will happen in another lifetime. Your priorities are all near term: get to the next stage in your career, pay off your student loans and get your own place because you're getting tired of living with roommates.

But planning for retirement early is important, says Raquel Ferreira, senior financial advisor and mutual fund representative at Scotiabank. 

Unsure how to get started contributing to things like registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), while also trying to balance all your short and medium-term goals? It's not too tricky to do, especially if you follow the tips below, which should help you start your retirement savings journey.

You might be most worried about showing up on time and making a good impression on your first day at a new job, but you should also be thinking about your retirement. Many companies offer benefits that help you save for retirement through RRSP or pension contributions, says Ferreira. Make sure to sign up for those and set up an automatic contribution from your paycheque if the company offers matching money.

“Not taking advantage of matching retirement contributions is like walking away from free money," says Ferreira.

Even if your employer doesn't offer contributions, Ferreira suggests you set up a RRSP yourself and start putting money aside every paycheque to simplify planning for retirement.

She adds, “Starting early means that your money has time to grow and earn compound interest, or interest on the interest you make. If you wait even just five years before you start investing for retirement, the amount you'd need to regularly invest could increase exponentially."

With Pre-Authorized Contributions (PACs), you choose the amount you’d like to contribute, and how often – and you make adjustments at any point in time. That amount you choose will be automatically deducted from your savings or chequing account and deposited into your investment account.

You can choose to contribute weekly, bi-weekly, monthly, quarterly, semi-annually or annually. 

While Ferreira recommends that everyone plan for retirement early, she understands young people might have other priorities they want to tackle first, like paying off their student loans. As a result, financial planning for retirement might not be on their radar early in their career because they're focused about repaying those loans.

“It's important to pay your monthly student debt payment," she says. “But if you have any extra money, put that towards your retirement. Then use any pay increases or bonuses you get to supplement those savings."

Ready to start planning for retirement? Ferreira says there are four main steps to doing so.

You can't start financial planning for retirement if you don't know what you want your retirement to look like since that may affect your retirement income, your planned retirement age, your cost of living, the inflation rate, your life expectancy, your taxable income and your broader financial plan. That can be hard to gauge if you're in your 20s and unsure what you'll want when you're in your 60s or what will even be available then for retirees.

“While your goals for your retirement can change, imagining what your retirement could look like helps you figure out how much to save and motivates you to save for it," Ferreira says. "What hobbies would you want to pursue? Would you want to travel? Share this with a Scotia advisor who can help you come up with a number and plan."

An important step in financial planning for retirement involves setting up the right investment accounts.

An RRSP allows you to save before-tax money. It is only taxed when you take it out upon retirement, says Ferreira. Even better, when you make a contribution, you often get a tax-refund because your employer has deducted taxes on that income without factoring in your RRSP contribution, so it's like finding extra money! When you withdraw from your RRSP, the withdrawal will by taxed (with some exceptions like if you are using it to buy your first home).

A TFSA allows you to save money after tax, which you then don't have to pay taxes on when you make withdrawals from it. A TFSA is more flexible than an RRSP in that you can take money out of it to use for any purpose and put money back in at any time.

Both a TFSA and a RRSP have annual contribution limits. “Having both types of accounts gives you flexibility in your planning," says Ferreira.

She adds that you can save money in a number of other ways via savings accounts, an annuity, brokerage accounts, life insurance, exchange traded funds (ETFs) and any other investment vehicle.

“For example, I see a lot of people buying property to live off the rent in their retirement," she says.

It's important to factor government benefits into your retirement plan too. Those include the Government of Canada's Guaranteed Income Supplement (GIS), Old Age Security (OAS) and the Canada Pension Plan (CPP).

Once you have your accounts set up, you have to determine what your risk tolerance and asset allocation will be. Investments vary in their level of risk, interest rates, compounding rates and rates of return. For example, a bond tends to have less risk than a tech stock, but its also has less potential for growth.

Your risk tolerance will determine what investments you choose and how aggressively you're investing for your future. You want to find a balance that works for you, gives you peace of mind and helps you build your nest egg.

You'll also want to make sure you put your money in different kinds of industries and investments so that all your assets aren't tied to one sector. That's an important way to reduce the risk that you'll lose money if that industry faces a downturn.

The next step towards reaching your retirement goals is contributing regularly to your retirement plan. That can be difficult if you have a lot of other financial objectives like paying for a wedding, buying a car, moving to your own place, or purchasing a home. But Ferreira says that you can start small.

“No amount is too small," she says. “Even $25 a month will help you get started and you can add to it as you grow older and your income grows."

While getting started is key, making sure that you stay the course throughout the process is also critical, says Ferreira.

Want to figure out when to start planning for retirement and how much you'll have when you retire based on how much you contribute? Ferreira recommends Scotia's Retirement Savings Calculator as a good tool to start plotting out your future net worth.

“A savings calculator can help, because you can put in different information and see how much you need, but also see how much putting different regular amounts towards your savings can impact your retirement savings growth."

While a retirement savings calculator is a good place to start imagining your future nest egg, Ferreira recommends that you get help from an advisor from your bank when it comes to financial planning for retirement.

“It's normal to feel nervous and intimidated about investing and retirement planning," she says. “It really does help talking to an advisor that you feel comfortable with because they can help educate you about all these financial instruments and show you how to meet your financial goals. They're there on the journey with you and everything just becomes easier with someone in your corner working with you."