Savings

Laura, 36, has exhausted her savings to live abroad and study. How can she replenish her nest egg with $72,800 a year?

Laura, 36, worries about the future. She used up her savings at 30 to live abroad for a year and a half and go to college, but now she’s saving again and wondering how much she needs to save for her retirement.

Laura earns $72,800 a year working in an NGO. She earns an average of an additional $1,100 freelancing per month. Although she has a good understanding of her spending and saving, Laura doesn’t know what steps she needs to take financially to feel more secure about her golden years.

“I would like to know if I am comfortable in retirement. I don’t really know how much I need to retire at 65,” says Laura. “I spent my TFSA while living abroad for over a year and going back to school.

Currently, Laura invests $200 per month in a Wealthsimple Medium Risk Investment TFSA.

“There’s only $2,000 in it right now and it’s losing money, but I imagine that will go up when the markets improve,” Laura says.

She also has $23,500 in an RRSP, to which she contributes $600 a month. “It goes straight into the account without me ever seeing the money. It’s just a daily interest RRSP with my bank and I’d like to switch to an option that brings in more money,” Laura says.

In a regular savings account, Laura has $50,000 (US) from her family that she doesn’t know what to do with.

“It’s in a regular savings account, which I think I should do something with. But this account is not meant for any type of expense and should only be used to contribute towards a down payment if needed one day, so I don’t see it as money that I actually have,” says Laura. is completely unaffordable.”

Can Laura make her finances work to achieve her retirement goals? We asked her for two weeks of expenses to see what she can do.

The Expert: Jason Heath, CEO of Objective financial partners.

Laura seems to have great control over her spending and savings and knows where everything is going. She saves automatically each month in her TFSA and in a group RRSP with a matching contribution from the employer. Spending less than you earn and saving systematically are key strategies for financial success.

She notes that her TFSA is losing money but doesn’t seem too worried. She has the right mindset recognizing that markets don’t move in a straight line and that volatility is inherent in investing. For a long term savings goal, losing money every few years is the trade off for earning mid to high single digit returns over the long term. When you are in the accumulation phase, a stock market pullback simply means that stocks are selling.

Laura has a lot that could change her path over the next 30 years, but since she’s asking how much she needs to retire at 65, we can do some quick math. If Laura continues her current TFSA and RRSP contributions until age 65, increasing with inflation each year, earning a 5% annual return, she would have over $1.1 million in savings. savings at age 65. This could probably support about $20,000 after-tax expenditures in today’s dollars for life. Government pensions — the Canada Pension Plan and Old Age Security — would probably cover an additional $20,000 of after-tax expenses in today’s dollars. That’s about $3,333 a month, and she’s spending about $4,000 a month now if we take away her TFSA contributions and her monthly therapy.

It’s a really rough calculation. As her salary increases, if she allocates a slightly higher percentage to savings, it wouldn’t take much to close the gap. Likewise if his investments yield a higher return. So Laura may be on a relatively good trajectory. Mind you, she has no car payments right now. She could enter into a relationship that would reduce her monthly expenses. If she buys a house, she could trade rent for mortgage payments. She could inherit her family’s money. So there are a lot of variables that make a back-of-the-napkin calculation a mere approximation.

She should take the time to learn more about investing so she feels comfortable investing her RRSP for the long term. It’s cash right now, so it’s not working for her. She should use her family’s $50,000 in a savings account to at least contribute to a TFSA. Even if she wants to keep some or all of it in cash, at least the interest will be tax-free. But it looks like she has no imminent plans to buy a house in Toronto anyway, so she might as well invest some of the money for the longer term.

Laura should make sure she maximizes her tax deductions and credits. As an employee working from home and self-employed, she will have home office expenses as well as car expenses and other miscellaneous expenses that she can deduct on her tax return. Contributions to an RRSP could benefit his level of income and reduce the tax payable on his untaxed freelance earnings. His $240 per month of therapy is an eligible medical expense. Even if she has a group health insurance plan at work, her co-pay or share of expenses not covered by the plan, as well as the premiums she pays, will also be eligible for a medical expense tax credit. .

Results: She spent less. Expenses the first week: $813.53. Second week expenses: $627.97.

How she thinks she did

Laura admits that she hasn’t changed her spending habits much, “mainly because my goals all seem distant and therefore almost a bit ambitious”.

She’s been more money-conscious and seeing the counselor doing simple math to save has encouraged her to spend less in certain areas, including takeout and dinners.

“If I cut my weekly dinner and takeout spending by just $40, I’ll save $2,080 a year, which is definitely a bigger motivator than just thinking about $40,” Laura says.

Take away food :

Laura still feels overwhelmed and confused by the investment options described by Heath, but she found his advice encouraging.

Heath’s “back of the napkin” calculations have her thinking hard about how much money she wants to have each month when she retires.

“The easiest way for me to save is to never see the money in my account to begin with, so I can take the advice to increase my RRSP contributions directly through my employer so that the ‘Money doesn’t feel like mine to begin with,’ Laura says.

She plans to take Heath’s advice and put her share of her savings in a TFSA, but adds that she doesn’t know how to choose one and doesn’t trust her bank to give her the best advice. This motivated her to consider taking a business or finance course to further her financial knowledge.

“This exercise was a good kick in the butt to really look at RRSP options and maybe find an investing 101 course to take.”

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