When it comes to personal finance, so much importance is placed on saving for retirement. However, retirement shouldn’t be the top financial priority for everyone.
Let’s look at some examples of when you may need to look at the big picture and let retirement planning take a backseat to more urgent financial issues.
1. Dealing with debt
Anna graduated from university a year ago and has $20,000 in student loan debt. Although she is working full-time now, she has taken on $10,000 in credit card debt over the past year because her current salary isn’t enough to support the lifestyle she wants (mainly travel and fancy restaurants).
She has been managing to save $50 per month in her RRSP for her retirement, but she’s worried she isn’t saving enough.
What should Anna do?
Saving should really be the last priority for Anna at this point. Her main challenges right now are cash flow planning and debt reduction, and this is where she should focus her energy. In fact, she should even consider stopping her $50 per month savings plan, so she can allocate those funds to paying off her debt.
First, she should speak to her financial institution about getting a debt consolidation loan. This would allow her to group all her debt into one amount at a lower rate of interest, so she can pay it off faster.
Second, a debt consolidation is only effective if it is coupled with a spending plan to ensure she doesn’t continue taking on more debt. Her financial institution can help her with this as well. Here are some tips to help reduce your debt.
Sooner than later, if she pays down her debt (and maybe earns more money as her career progresses), she will find the opportunity to start saving again.
2. Saving for a mortgage
Shirley and Pete just got married and are starting to discuss their financial dreams as a couple. Their goals are to save for retirement and buy a home in the next five years. They are both diligent savers, so they already have about $50,000 each in RRSPs. But while their retirement savings are on track, they don’t know how they’ll come up with a down payment in time to meet their housing goal.
What should Shirley and Pete do?
First, the good news: as first time home buyers, they can withdraw up to $25,000 each ($50,000 in total) tax free from their RRSPs, under the Home Buyer’s Plan (HBP).
Second, they should begin making their future savings contributions into a TFSA instead of using an RRSP. Withdrawals from a RRSP (over and above the HBP allowance) are going to be taxed as regular income. Using a TFSA will ensure that if they require more than $50,000 for their down payment, they can access extra funds with no tax consequence. Learn more about RRSP versus TFSA.
Once their housing goal is achieved, they can consider resuming their RRSP contributions.
3. Planning for the family
Patrick and Janet are in their mid-30’s and have two young children. They both have steady jobs and make decent income. They are debt-free, thanks to a debt reduction plan that they started five years ago, and are now starting to think about saving for retirement. They currently don’t have wills or personal insurance of any kind.
What should Patrick and Janet do?
For a young family with kids, wills and insurance need to be a top priority. Many people put off dealing with these items. For some, it’s because of the cost. For others, it’s just not fun to consider their own mortality.
They should consider using some of their excess cash flow to buy life insurance. If one spouse dies unexpectedly (or both), it will put massive financial strain on the family in addition to the obvious emotional toll they will experience.
Disability and critical illness coverage should also be considered, to ensure that an unforeseen injury or illness doesn’t cause financial hardship for the family. The good news is that these kinds of insurance are relatively inexpensive when you are still young!
They also need to have wills done. For a couple with young kids, the most pressing reason is to designate guardianship of their minor children. If this is not documented in a will and the parents pass away, then the decision of guardianship is made by the courts and may not be aligned with the parents’ wishes. Learn more about why you need a will and how to get started.
After covering the costs of wills and insurance, they can use what’s left over towards their savings goals.
The take away
Saving for retirement is important. But for many young people, it’s not the most urgent issue to address. Take a step back and consider the bigger picture to make sure you’re taking the best path forward for you.
As always, we recommend that you talk to your financial institution to get more specific advice. You can talk to a financial planner at Vancity about options relating to your specific situation. Not a Vancity member? Join us.