How to put your finances on the right path to retirement
While your pension will provide you with your main source of income in retirement, there are steps you should be taking at various stages in your career to ensure true financial freedom in your golden years.
In your 20s: it’s all about getting into good financial habits.
This is the time in your life when retirement is the furthest thing from your mind. Particularly since you know you’re building pension credit for that golden day when you reach your 85 or 90 factor. However, just because you’re in your 20s and have a pension plan in place doesn’t mean you should be complacent when it comes to financial planning.
Especially when you factor in the following:
- Education members tend to retire earlier than the average Canadian (age 59)
- There are currently 148 retired educators over the age of 100 (according to the Ontario Teachers’ Pension Plan)
With a good chance you’ll be spending more years in retirement than working, by the time you’re retired you’ll want to make sure you’re not still paying off a mortgage (or knee deep in other debt). That’s why you need to be practicing the kind of habits that will put you on a path to financial freedom. Because the financial decisions you make in your 20s will have a longstanding impact on your life—for better, or worse.
With that said, here are a few good financial habits you should be practicing at any age:
- Set yourself a budget and stick to it (i.e. live within your means)
- Get your debt under control by consolidating high-interest loans and credit cards
- Use any extra cash flow to make regular contributions to an investment account so you can save for future goals (such as down payment on a home, vacations in the summer months, etc.)
Did you know?
According to the Ontario Teachers’ Pension Plan (OTPP), 1 in 5 members paying into the pension plan under the age of 30 are occasional teachers.
In your 30s: it’s all about planning for the big life changes to come.
As you move your way up the pay grid, perhaps your personal life is also moving forward. Getting married, having kids, buying your first house—your 30s is the decade when all kinds of major life changes tend to occur.
Your financial plan should also be evolving to keep up with those changes.
While retirement is still a long way off, don’t forget to keep the big picture in mind. To ensure your pension income will be free to spend on living the life you want in retirement, this is when you should start mapping out a timeline of the various big ticket items and goals you want to accomplish in the next several years and then start allocating funds towards your investment accounts in order to achieve them.
Let’s say in the next 5 years your goal is to make a down payment on a home:
- Consider setting up a PAC (Pre-Authorized Contribution plan)—where you can set up an amount that works within your budget to automatically come out of your account on a bi-weekly or monthly basis
- Maximize your PAC contributions by depositing them into a Tax-Free Savings Account (TFSA)—that way when it comes time to withdraw the money you need for a down payment, you can do so, tax-free
Having kids? Start contributing to an RESP the moment they’re born.
With the cost of post-secondary tuition rising every year, the sooner you contribute to an RESP (Registered Education Savings Plan), the more you’ll reap the benefits of compound interest to build up those savings.
Plus with an RESP, you get the added benefit of:
- CESG (Canada Education Savings Grant): where you’ll receive an additional 20% of your RESP investment on the first $2,500 per year ($500 annually up to a lifetime maximum of $7,200 per child)
- It’s tax-sheltered:contribute up to $50,000 per child and the investment will then grow, sheltered from tax (similar to an RRSP)—when the money is withdrawn, the CESG money and earned investment income will be taxed at the child’s tax rate, possibly zero in some cases
In your 40s and 50s: it’s all about wealth building and paying down your mortgage (and other debt).
By the time you enter the midpoint of your career (and middle age), your finances should be operating like a well-oiled machine. You are most likely at the top of the pay grid—and if your spouse is working, you’ll have the benefit of two incomes to dedicate to your daily expenses, as well as your long-term financial goals.
With retirement now on the horizon, here are a few things you can do to keep your finances on track as you approach the finish line:
- If you’ve taken a leave of absence at any time during your education career, it’s a good idea to buyback all eligible pension credit (buying back credit helps you maximize the value of your pension and ensures you’ll reach your 85 or 90 factor at your earliest possible date). Keep in mind, there are rules regarding when and how the buyback can be made. Contact OTPP or OMERS for specifics
- Pay your mortgage off faster by switching to accelerated mortgage payments (because you should aim to be mortgage-free by the time you retire)
- Review your financial plan to ensure everything is on track to achieving your goals within the set timeline you have in place
Did you know?
The benefit you earn through your pension plan (OTPP, OMERS) is linked to RRSP contribution room. The greater the value of your pension benefit, the less room you will have to contribute to an RRSP.
Whether it’s years, months, or days away—Educators Financial Group can ensure your finances are on the right path to retirement.
From pay grids to pension plans, we understand how your pay structure works during your working years and in retirement. Which means we can ensure you’ve got the right strategy in place to achieve your financial dreams and goals at any stage of your education career and in life.
