Retirement Planning - Saving For Your Retirement

I love those Freedom 55 commercials - the ones that show "me in the future". Wow! They all seem so happy, enjoying their early retirement...and financially secure...and you just have to wonder how they accomplished that. They must have had some sort of manual - :Retirement Planning - Saving for Your Retirement", perhaps.

Some years ago. a good friend loaned me a book entitled "The Wealthy Barber". It became my bible for retirement investment strategies. The author's basic concepts were simple and easy to follow - put a little money away each month in mutual funds, and through the magic of compounding interest, your nice little nest-egg will grow into a lovely, fat, retirement-funding cushion.

Time was, when we could count on a company pension from our long-term employment. That, and our life's savings would see us through those so-called golden years. Times have changed.

Many companies no longer offer an employee pension plan, but rather, they may invite participation in stock option plans, or in a variety of retirement savings plans that are largely employee-directed, and easily portable should the employee change jobs or companies, and the employer is spared the expense and headaches of maintaining a company-run pension fund.

These plans are often invested in mutual funds. By participating, the employees "own" their portions of the investment pool. Should the employee leave, though they can no longer benefit by participation in the group investment pool, they will be able to roll their savings over into another investment vehicle that will allow them to continue to make contributions.

Life Insurance used to be the thing to have to protect your family in case of sudden or unexpected death. Whole LIfe Insurance used to be the most popular form among those with a young family, as a comprehensive policy can give everyone great peace of mind.

While some kind of insurance is important if you will leave behind a family in need of support, you may only need to plan for some kind of legacy, or simply leave monies to cover your funeral expanses.

Many forms of insurance only allow you to contribute until you reach a certain age, but there are some kinds of permanent insurance policies that allow you to continue contributing your whole life, and guarantee a set dollar amount payout upon your death. Amounts vary greatly depending on the policy carrier, but usually start at $25,000.00, increasing in regular increments from there.

A plan such as this could easily be set up to cover your final expenses, but the real question is how do you look after yourself in the meantime? In these days of an uncertain economy, it is so important to make some financial plans for your future.

Retirement Savings Plans come in several flavors.Though there are many unregistered plans and funds available, Registered Retirement Savings Plans, or RRSPs, tend to be slightly more popular.

RRSPs were originally instituted in Canada in 1957 as a way to defer income tax, giving you a tax credit during your higher earning years, and allowing you to access the savings during a time of projected lower earnings. As tax on whatever goes in is only deferred, it must be paid when the money comes back out, along with the applicable taxes on whatever interest has accrued.

You can also designate a beneficiary for your RRSP - someone who will inherit this money in the event of your death.

There are strict guidelines in place regarding how much of your income can be put into RRSPs in any tax year. As well, after you reach the age of seventy, you are no longer allowed to contribute to your RRSPs, and you must either roll them over into some other vehicle, or begin drawing out the money, and, of course, paying the taxes on it.

For example, you manage to put $50.00 a month into your RRSPs. Over the course of a year, that's a $600.00 contribution, and you will receive a a tax credit for that amount. Over the course of your lifetime, you continue to contribute that amount each year.

For this example, we will assume a bit of a late start, at age 45, with a twenty-five year deposit life-time, which means you have saved $15,000.00...and, don't forget the interest that is accruing.

By age seventy you must roll the money over into another plan or begin drawing it out. So you begin to draw out the money to live on, and pay taxes on it, as well as on all that lovely interest. The math whizzes among you can calculate what the typical interest would really be, but for the sake of our example, and non-math whizzes, we will postulate that your investments did extremely well and have earned you a 30% increase. Now you have $19,500.00 in your RRSP, and that is the amount on which you will pay taxes as you draw it out..

The whole point of this vehicle, as I mentioned, was that it allows you to defer paying taxes on your money 'til a time when your income will be lower, and therefore you will pay less tax - not a bad plan, in all.

Of course, your money will now be worth less due to inflation, so the interest you gained may well be eaten up by the difference in the dollar value, but had you not put that money away, you would be in even worse financial shape.

Tax Free Savings Accounts are a recent entry into the field of retirement savings vehicles.

Unlike an RRSP, the Tax Free Savings Account, or TFSA, requires that you pay taxes on the money you deposit into the account. There is no tax credit issued and no immediate benefit to your income tax situation.

So where does the "tax free" part of this come about, and how can it be called tax free if I am paying tax on my contributions?

There are two major benefits to this type of account. First, there is no age limit or cutoff for contributing. You can put money into this account until the day you die. The second benefit occurs when you take the money out.

Here's how it works. You sign up for the account, and decide on your "portfolio", that is, decide into which investment vehicles you will put your savings - GICs, mutual funds, stock and bonds, or some combination of investments.

You make deposit money into your TFSA - the same $50.00 a month you would have put into your RRSP. Using the example above, in the same twenty-five years you have gained the same amount on your investments, and your TFSA holds $19,500.00.

You can use this money at any time, draw it out with no tax penalty because you already paid taxes on it. The great thing about this account is that the savings accrued to the account, any interest your investments have earned - the $7500.00 addition of our example, is tax free.

The benefit of such an account in Estate Planning is quite clear.

When an RRSP is paid out to the beneficiary, the taxes owing must be paid on the amount invested plus the accrued interest - out of the estate of the deceased. The taxes have already been paid on the amount invested in the TSFA, which is part of the estate. The TSFA - the original amount plus all that lovely interest - is inherited tax free. Everybody comes out ahead this way.

Remember, not only do we want to put money away for our retirement, we want that money to grow and multiply. To do that, your contributions must be invested in something that will pay you interest.

Your RRSP or TFSA can be invested in any number of plans, depending on what your banker or investment agent has to offer, and the level of "risk" you can sustain, for there is always some risk involved with investments of any kind.

Some of the more common investment vehicles include Guaranteed Investment Certificates, or GICs, Stocks & Bonds,and Mutual Funds.

Guaranteed Investment Certificates do offer the advantage of being absolutely secure. Your money is guaranteed to be there when the certificate matures.

You purchase the GIC at a certain percentage, over a specified number of years, and when the GIC matures, when it is "paid for", you receive your capital investment plus the interest that has accrued.

There is a price for that security, though. Usually the interest rate is extremely low, and the monies you invest this way do not benefit from the "miracle of compounding interest".

Mutual Funds are also a popular vehicle for retirement investment plans.

The truly great thing about many mutual funds is they allow individual investors with a smaller amount of capital to invest, who would not be able to invest on their own, to participate by investing as part of a group.

They appear to be less stable than many of the stocks and bonds, because mutual funds are susceptible to marked fluctuations in value, seesawing up and down. They are not a good short term investment product because of this. Over the long term though, they can be an excellent choice. Though the funds will show their typical up and down, saw-toothed graph, the overall trend will be upward.

Playing the stock market, dabbling in stocks and bond - these are terms from a time when only the wealthy or the wanna-be became involved in the investment jungle. With the advent of the Internet, anyone with a computer has access to masses of information on investing and a bewildering variety of investment opportunities.

Do your research - look around, ask some questions, talk to your banker or an investment counsellor or two, and find out what feels right for you...and then get started.