Chris Chapman spends most of his days meeting clients and leading strategy sessions with employees. But despite his busy schedule, he always makes time for his finances.
Chapman is the president of Derailleur Consulting Inc., a Toronto-based business coaching and training consultancy. Every year, Chapman usually makes a lump-sum deposit close to tax time. About 15% of his gross earnings goes into in a balanced portfolio of exchange-traded funds. “I let it ride for a year, and rebalance the distributions around tax time,” he says.
Of course, Chapman says he could always do more. With taxes chipping away at his income and cost of living rising, he’s keen to find more ways to save. “Every year I work with an accountant. We look at what I want to accomplish and how to do that in the most efficient way.”
Most Canadians would likely say the same as Chapman: they’d want to save more if they could. Of course, with so many demands on our income, that’s easier said than done, says Justin Ezekiel. Ezekiel is Vancouver-based director of tax and estate planning for Sun Life Financial.
“Most people aren’t saving enough for retirement,” Ezekiel says. “They plan to work well into their sixties and beyond in many cases.”
In fact, a recent study found that 52% of Canadians aren’t sure whether they’re saving enough for retirement.
How to save more for retirement in Canada
Whether you’re already saving money or need to get started, there are ways to maximize your savings. Here are a few strategies to consider.
Automate your savings
The best long-term savings vehicles are still the registered retirement savings plan (RRSP) and the tax-free savings account (TFSA). But only about 65% of Canadians use one or the other, according to Statistics Canada. The problem is that people tend to invest in these accounts with an annual lump sum. It’s easy to miss out if that’s your approach, financial planners say.
It’s better to set up monthly or bi-weekly deposits from your chequing account into an RRSP or TFSA. This approach guarantees that you’ll save, says Jason Health, a Toronto-based financial planner. “Automating your investment is an important strategy.”
It’s also important to think about which account to use. RRSPs are well-suited for people in a higher tax bracket. This allows them to defer tax until retirement when they’re at a lower tax rate, Heath says. If you earn $30,000 or less, you’re typically advised to use a TFSA to save.
“If you’re in a low tax bracket when you contribute, it may be that your tax bracket in retirement will actually be higher,” he says. “Generally, if someone has a fairly low- or moderate-income level, a TFSA may be a better option.”
- Are you saving enough in your RRSP? Try our RRSP calculator to find out.
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- 6 really useful things you can do with your TFSA
Buy dividend-paying stocks
Owning dividend-paying stocks can also help provide some additional savings. The money they pay out can either be taken in cash or you can reinvest it in more stock.
Dividends received by a Canadian resident from a Canadian business are taxed more efficiently than regular income. This is thanks to the dividend tax credit.
“If you earn no other sources of income, you can earn just over $50,000 in eligible dividends tax-free in certain provinces,” Ezekiel says. “This is an unlikely scenario, as people tend to have supplementary income sources. But it illustrates the advantage of the credit, especially in lower tax brackets.”
Use segregated funds with guarantees
These benefits include guarantees, such as a guaranteed income or a minimum guaranteed value at the maturity date. “There are many versions of segregated fund contracts,” Ezekiel says. “For example, some guarantee a portion of the capital invested. While others guarantee a specified level of income for life.”
Senior and more conservative investors find these products useful, says Ezekiel. “This is because they can supplement a retirement plan by providing a guaranteed income stream for life.”
Small-business owners might find these products worthwhile, too, he adds. “They can act like a pension plan by providing funds for life. The small business owner could invest savings in a segregated fund contract at or even leading up to retirement.”
Pay attention to returns
The only way to increase savings is to make some sort of return in the market. While that return will vary based on your goals and where markets are at in their cycle, you should create a portfolio that can achieve the return you need.
While it’s never a good idea to jump from one investment to another, it is important to keep an eye on returns. “You want to see how your investments are doing and how similar funds are performing,” Ezekiel says.
What if you notice a similar fund keeps beating the performance of the one you hold. Ezekiel says then consider making a switch. “Past performance doesn’t mean future success. But you do want to invest with someone who has a good track record.”
Pay attention to fees, too. For example, to get the same return:
A fund with a 2.5% management expense ratio (MER) has to outperform the market more than a fund with a 1% MER would.
A higher MER is not an issue on its own. Maybe that higher-priced fund is generating a better return than the lower MER one. But if a manager can’t beat a comparative product because the MER is too high, then that could be a reason to switch.
At this point, Chapman says he is satisfied with his retirement savings strategy. He uses the dividends from his ETFs to buy more units, while his portfolio is growing steadily.
“I’m happy with how my retirement assets are growing,” he says. “It’s one fewer thing to worry about.”
- Are you on track to meet your retirement savings goal? Try our Retirement savings calculator to find out.
Not sure where to go from here? An advisor can help you put together a solid financial plan that suits your retirement goals. Find an advisor near you today.
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This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.