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January is a difficult month for financial optimism in Canada. The holidays are over, the days are short, the weather is bleak, and the credit‑card bills are starting to roll in. Yet this is the time of year when Canadians are expected to think about their long‑term financial future by making their RRSP contributions. Not surprisingly, this task often gets pushed aside.
The consequences are illustrated by B2B Bank’s statement that “Canadians have over $1-trillion in RRSP contribution room.” One way to look at this is to consider the fact that the unused contribution room is a rough guideline for a person’s shortfall in their retirement savings.
The issue isn’t a lack of concern for the future. It’s that “financial planning” is often thought of as a euphemism for “austerity budgeting,” and it is hard to get motivated to do that in the post‑holiday slump. The default course of action becomes contributing whatever is left over at the end of the month to your RRSP. For most people this can often amount to nothing.
But there is a better way.
Instead of treating retirement planning as a mathematical budgeting exercise, treat it as an exercise where you create your wish list. Start by answering three simple questions:
At what realistic age would you like to retire? How much will you need each month to cover your living expenses? What would you like to do in retirement?
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If you can answer these three questions, you’ve already built the foundation of a retirement plan. Fortunately, turning those answers into a financial projection is the easy part since you don’t need to do it. A financial adviser can do the heavy lifting and model several scenarios based on your goals and show you what you will need to do to get there. There will naturally be some tradeoffs, but it will give you a clear, personalized road map that you can follow.
What does this financial road map look like? It should have a starting point, where you summarize where you are right now with an overview of your assets and liabilities. And then it should also have an ending point – based on when you would like to retire, and what lifestyle and hobbies you expect to pursue, your adviser can calculate the target value required for your investment portfolio in the future.
Once you know your starting point and ending point, you can calculate what you need to save to achieve this. This is an iterative process since you would guide your adviser in creating the scenarios based on what you can reasonably expect to put aside from your cash flow.
The main benefit of doing this is that it will give you a strategy for achieving your goals and reducing your financial stress. Ask yourself this: Would you invest in a company that tried to sell as much as possible but had no business plan? Almost no one would. Yet many people run their financial lives exactly that way. Corporations formalize their goals on paper because it increases the likelihood of their success. Individuals can – and should – do the same.
So instead of focusing on the financial hangover of the holiday season, take 20 minutes to sit down with a pen and paper and answer the three questions above. Visualize what you want your retirement to be like. You will find this exercise to be surprisingly enjoyable, and it will give you something far more valuable than an RRSP contribution: peace of mind. Once you know the life you want, the financial plan becomes a tool – not a burden – to help you get there.
Because the goal isn’t solely to hit a specific return on your investments – it’s the confidence that comes from knowing that you will enjoy the retirement you want.
Anwar Husain is an award-winning finance professor at the University of Toronto and a senior investment adviser and wealth adviser with Richardson Wealth. He is also a published author in several peer-reviewed academic journals in the areas of finance and economics.