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How to Save for Retirement in Canada on a Small Income

By Debra Pangestu

Woman Saving for RetirementWith numerous financial responsibilities to juggle and a big chunk of their paycheques going towards monthly expenses, a growing concern among more Canadians is how to save for retirement in Canada, especially when they’re living paycheque to paycheque. A lot of people are likely wondering, if we’re struggling to make ends meet now, how are we going to take care of our expenses in the future when we’re no longer earning the same income we used to?

Saving for retirement can be challenging when your paycheques just barely cover your day-to-day expenses, and it’s for this reason that a lot of people haven’t gotten around to saving for their retirement. But, it’s important that your current financial situation doesn’t prevent you from building a retirement fund.

If you want to build up a comfortable nest egg so you can fully enjoy your golden years, here are some strategies that will help you feather your nest, even on a small income.

Start Retirement Planning Early

The key to saving a sizeable retirement fund is to begin your retirement planning early on, so start squirreling away money the soonest you can, even if it’s just $25 a week. For example, let’s say you plan to save $100 a month for your retirement. If you start to save for retirement when you’re 25, assuming a 6% rate of return, you would have around $190,000 in your retirement fund by the time you turn 65.

If money is tight and you’re barely able to make ends meet, don’t stress about not saving an optimal amount of money each month. What’s important is that you create a plan and start taking steps in the right direction. If you are able to start saving early, you’re doing your future self a big favour by allowing compound interest to work for you. Even if it’s just $50 a month, you’d be surprised by how small amounts can make a huge difference in the future. Here’s a handy retirement calculator that can help you with your retirement planning.

If your financial situation changes over the next few years, make sure the changes get reflected in your savings as well. If you get a raise at work or transition to a better paying job, it’s a good idea to bump up your monthly retirement savings amount. Likewise, if you find yourself in tough financial times don’t hesitate to cut back on the amount, and when your circumstances improve, you can bump that amount back up.

Make a Realistic Budget, and Stick To It

Making a plan for your money is an essential part of financial success, and if you’re just getting by with living paycheque to paycheque, chances are you haven’t made a plan for your money. Having a plan for your money is basically the same thing as having a budget: it shows how much money you have each month, and where that money needs to go. This allows you to have more control over your money, so you can make choices that will benefit you and your finances in the future.

To make a budget, add up all your sources of monthly income. The next step is to tally up all your monthly fixed expenses (car payments, rent, debt payments fall into this category), as well as your variable expenses (like groceries, entertainment, clothing). When you’re making your budget, it’s also crucial that you include your retirement savings. By doing this, you’re making saving for retirement a priority, instead of an afterthought.

If your expenses are less than what you earn, you’re in good shape. But if your expenses exceed your income, it’s time to look for holes in your budget. Perhaps you’re spending too much money, not earning enough money, or maybe it’s a combination of both. A budget will show you, in black and white, what you’ve been spending your money on, and it’ll also identify areas you can cut back on.

Once you get the hang of budgeting, it’s important that you review your budget periodically and keep it updated. If you’ve lost your job or your income stream has decreased, these changed should be reflected in your budget as well.

Related: How to create a budget or receive guidance creating a budget with this intelligent budget building tool

Set up Automated Deposits to Your Retirement Savings

Automating deposits into your retirement savings is an easy way to get started with building up your retirement nest egg. Once you’ve budgeted how much you can afford to save each month for your retirement, you can automate a payment for that amount so you won’t forget to make a contribution.

Another benefit of automating your payments is that the money gets funneled directly into your retirement fund, so you won’t get a chance to spend it. You won’t even realize the money is “missing” from your account so before you know it, you would have saved up a good amount of money for your retirement.

Cut Back On Expenses

Once you’ve created your budget, go through it and check for opportunities where you can save money. Great places to start looking are what you’re spending on eating out, what you’re spending on cell phones and cable, or what you’re spending on hobbies. Whatever money you save on trimming your expenses can go towards your retirement fund.

Couple Starts Saving for RetirementThere are many things we consider “necessities,” but when we really put it in perspective, those necessities are just extras that make life a bit more manageable. For example cellphones are a necessity for many, so instead of an expensive phone plan with all the bells and whistles, consider downsizing to a more basic plan. You can easily save $20 a month for your retirement right there! Also, look at your daily spending habits that you engage in without giving a second thought. Some of us can’t get our day started without a cup of coffee, but if we’re buying coffee at Tim Horton’s every day, that’s about $60 a month you could be saving for retirement. So instead of buying coffee at the local coffee shop, try brewing your own coffee at home and taking it with you to work in an insulated thermos.

Housing and transportation often take up a large chunk of our budget, and although housing and transportation truly are necessities, there probably is some room to free up money for your retirement. To cut back on housing costs, consider downsizing to a smaller home or apartment, or you can consider getting a roommate or renting out a room.  That way, you can save on your monthly housing and utility payments. You can also consider refinancing your mortgage, and whatever money you save can get funneled towards your retirement fund.

If you are a two-car family, consider selling one car or driving it less often. You’ll save a lot on gas, maintenance and insurance (the average vehicle owner spends about $9,000 per year to own and operate each vehicle they own. So there are some potentially big savings here if you’re “average”). You can consider take public transportation instead (it’s typically 80% cheaper), or work out a rotating schedule on who can drive the car. If having two cars is a necessity, consider possibly selling one car and buy something less expensive and more fuel efficient.

Related: More Ways to Save a Whole Lot of Money

You can also save money on household expenses, like groceries and food. Eating out for lunch or dinner (or both!) is much easier and convenient, but it’s also an easy way for your money to disappear. We often rationalize going out for lunch or dinner because we don’t have the time to grocery shop and cook, and although preparing meals on your own will take up some time, it also keeps you in control of your money. So, try to eat at home more often. To save time – and money – grocery shop and make several meals over the weekend, so you can freeze them to use during the work week. For many more ways to save on groceries, click here.

Cutting back on expenses is just one aspect of saving up for retirement. Spending too much on discretionary items can hurt our retirement plan, but if we make too many cutbacks we’ll only end up depriving ourselves of things that bring us joy, which can backfire down the road. In addition to cutting back on your expenses, look for ways to increase your income as well – which we’ll discuss below – so your cutbacks won’t be too severe.

Related: How to Stop Spending Money – 7 Tips and Tricks to Curb Your Overspending

Find Ways to Increase Your Cash Flow

Cutting your discretionary spending is a great way to find a little extra money to put towards retirement, but there’s only so much room to cut back. Once you’ve made some reasonable cuts, it’s time to focus on finding ways to increase your cash flow. Finding more money each month is easier said than done, but rest assured, it can be done!

A very important key to saving for retirement in Canada – that many have lost sight of – is to earn more than you spend. Since you’ve already cut down on your spending by making budget cutbacks, the next thing to do is to up your income. You can ask for a raise at work, or you can apply for a job that offers a higher pay and better benefits. You can also pick up extra shifts or take on a second job during the weekends or evenings, if your schedule allows it. Depending on your skill set, you can also look into starting a side business or freelancing. For example, selling your crafts on Etsy and writing freelance articles and blog posts are great ways to earn extra income. Capitalize on one of your passions and see where it takes you.

When you come across a windfall – like an income tax refund, a bonus from work, birthday money, or even $10 you find in the parking lot – put it towards your retirement savings. Since it’s not money you were budgeting for, stashing it in your retirement fund won’t hurt your budget. It can certainly be tempting to spend the windfall on a trip, for updates on your home, or on something new for the kids. But until you get on firm financial ground, try your best to resist the urge to spend those windfalls. For many more places to find money to save each month, have a look at this.

Even when you retire, a part-time job might be worth considering. The extra flow of income will pad your retirement account, and the social interactions can help retirees stay active and feel connected.

Find a Job with Good Retirement Benefits

If you’re thinking about switching jobs, it pays to consider positions that offer a retirement plan as part of the compensation package. Many companies offer a retirement matching plan, in which they match your retirement contributions (often deducted from your paycheque) up to a certain amount. If this is something your company offers, make sure you participate in it, because you’re essentially getting free money!

If your company doesn’t offer a retirement plan, don’t let that stop you from starting one on your own. You can open up a savings account and automate payments to coincide with your paydays. Although your contributions won’t get matched, however much you contribute will make a big difference in the grand scheme of things, and you’re setting into motion some good financial habits.

Once you start to build up your nest egg, make sure the money stays there until you retire. If you spend it before you retire, you could get hit with an early withdrawal penalty. And, if you take out money, the compound interest you would have generated won’t be as great.

Pay Off Your Debts and Give Your Credit Cards a Break

Pay Off Debt by Cutting Back on Credit Card UseIf you want to enjoy a comfortable retirement, you need to make debt-free living a priority. There are many of us out there who think we have to either save for retirement or pay off debt, but if you can budget smartly, there’s no reason why you can’t do both. If you can start to reduce your high interest credit card debt now, you’ll free up more money to put towards your retirement fund.  Plus, if you can pay off your debts now, you won’t have to worry about shouldering debt payments in your retirement.

One of the best ways to pay off debt is to stop using your credit cards. Studies have shown that we tend to spend more when we’re out shopping with a credit card than if we were shopping with cash. After all, it’s much more convenient to swipe and tap our credit card than it is to take out cash from our wallet and watch it disappear into a cash register. And with credit cards, there are also interest charges and fees you need to account for. So, stick with cash for a few months. You’ll be surprised by how much money you’ll free up for your retirement fund.

If you’re ready to tackle your debt, here are some debt repayment tips to help you get started. It also doesn’t hurt to speak with a professional to get some advice on how to pay off debt. A local non-profit credit counsellor located near you would be happy to go through your finances with you and help you put together a plan to pay off debt so you can start saving for retirement.  

If You’re Unsure How to Save for Retirement, Seek Professional Help

Sitting down with a professional can make a world of difference if you want to know how to save for retirement. If saving for retirement has become a challenge because you’re struggling with debt and you’re having difficulty managing your money, the best thing to do is to make an appointment with one of our accredited credit counsellors.

A credit counsellor will go through your finances with you, they’ll present you with different options personalized to your financial situation, and they’ll also help you put together a plan to pay off your debt. And, to ensure your road to financial freedom ends in success, they’ll also provide you with budgeting and money management guidance so you can get your finances on track and start saving for retirement.

Once your finances are under control and you’ve started saving for your retirement, speaking with a financial planner is something worth considering. With a saving plan in place, a financial planner can help you prepare for your future by walking you through different vehicles for your retirement savings, such as a Tax-Free Savings Account or a Registered Retirement Savings Plan. For more detailed information on planning for your retirement, speak with a Financial Planner or get more information here.

Jump-start Your Retirement By Thinking About the Future, Now

If your paycheques are barely enough to take care of all your present expenses, the idea of saving for your future retirement may seem unreasonable. In an ideal world, we would start saving for retirement earlier on in life so we’ll have ample time for our nest egg to grow. The larger our retirement fund, the more options we’ll be able to enjoy during our golden years.

Although many of us will receive a pension through the Canada Pension Plan plus Old Age Security at 65, it only provides a very meager monthly income. You’ll need to make sure you top this up by saving enough so that you can maintain your current lifestyle once you leave the working world. Usually this means you’ll need to 50% to 60% of your current income in retirement. So, think about what you want your retirement to look like, and what you want to be able to do. Write down your goals, think about how much money you’ll need to enjoy those things, and start tucking money away. If you haven’t been saving, then any sort of saving makes a big difference. Diligence is the key to saving, and hopefully the steps mentioned above now give you a better understanding of how to save for retirement in Canada, even on a limited income. 

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