Fabulously Broke’s Retirement + Investing Primer – Pt. 2: Basic Retirement Must-Dos You Cannot Ignore or Put Off Anymore

DISCLAIMER: This is totally from my own personal experience and point of view. I am not a professional financial advisor, nor do I claim to be one. I’m just a girl trying to make it through the world and pass on what I’ve learned so far from reading, talking to others, and by trial and error. I’m also purposely keeping it simple.

PART TWO: BASIC RETIREMENT MUST-DOS YOU CANNOT IGNORE OR PUT OFF ANYMORE

First, get a retirement plan.

Always sign up for your company retirement plan. It’s free money. If your company matches $1 for each of your own dollars, up to let’s say 4% you’re basically getting another 4% of your income for free, for total of 8% in your plan at the end of the year. The best part? You’re automatically saving for retirement, and believe me, you won’t notice it missing – I sure didn’t when I first signed up for my company plan.

If you’re in the States, I think it’s called the 401k plan, and you also have something called a ROTH IRA. I don’t know what the specifics are, but I think the ROTH IRA has a limit of about $4k, and the 401k works like the RRSP. Either way, read up more on it via other great (American) blogs listed in my fabulous budget blogroll on your right, and get educated.

This is rare, but in some cases, the company will give you an AUTOMATIC retirement plan whether you like it or not, and whether you put money in or not. They’ll either take/give 4% of your income every month/year and put it into a retirement plan (some plans increase it by a percentage point (1 percent) every 5-10 years up to 6%). A lot of companies don’t do this any more because they are counting on your laziness. The average North American does NOT have a retirement savings plan, nor do they bother signing up for one (please don’t be a statistic!) and the companies are banking on this laziness, and cashing in by saying: “If you don’t put in any of your money upfront, we won’t either. Why should we automatically give you a pension plan?”

But if you don’t have a company retirement plan, or anything like that, then go talk to the banks – TD Bank, ING Direct, CIBC, PC Financial, Royal Bank, Scotia Bank, are all the usual suspects for this sort of thing. Talk to them about setting up a BASIC, SELF-DIRECTED (means you handle and decide where your money goes, not them) NO-FRILLS, retirement RRSP. Ask them how much the fee is a year, and what the other conditions are if you open this account (do you need a minimum balance of $100? $1000? $10,000?).

Personally, I’m with TD Bank, at the most basic of levels – the Basic RSP. It’s $50/a year, but if you maintain a balance of $10,000 in there, it’s free. What more incentive do I need to save money, especially since I can probably hit that mark at the end of this year, if not the next? I’m not trying to drum up business for TD because there are plenty of other great plans out there, but TD Bank just happened to be my bank years ago before I switched to PC Financial (which is actually part of CIBC via its Amicus branch), and I do ALL of my daily banking and online transactions with PC as well as my credit cards. I’d suggest going in person to see someone who can help you open an account like that, admitting you’re a novice, and asking a LOT of questions about anything you can think of – fees, minimum holding periods, fees for if you switch it to another bank, transfer fees, debit fees, any other perks like being able to use a bank card from them (if you don’t already bank with them) at any ATM, etc. If you really love your regular bank (be it CIBC, or Royal Bank, etc) then go and talk to them FIRST. They may give you a deal or a discount depending on how long you’ve been a customer and how much they value your business (It’s rare, but hey, it’s worth a shot. What do you have a to lose? You’ve already admitted you know nothing about what they offer in terms of accounts).

Second, allot cash to your retirement plan.

Start immediately. And start saving WHATEVER you can, no matter how small, but preferably a goodly percentage. How large, you say? My rule of thumb would be to allot at least 10% of your take-home pay (e.g. $1000 dollars x 0.10 = $100). If you can swing more, I’d say go the whole hog up to 20%, no matter what age you are. This becomes even more important to keep in mind if you’re older – if you’re nearing retirement age (I’d say in your 40s-50s), you can’t afford to put it off until later, your recommended will be higher, at 15%-25%. If you’re younger however, from your 20s-30s, then you can sort of afford to keep putting away only 10%, because you started earlier, and will have the benefit of those many more years of compounding interest to back you up. But the bottom line is to start now. Not tomorrow. Not next week, or next month when money is better, but NOW.

Third, don’t forget your emergency savings fund.

I don’t want to say that by saving in retirement you’re fine and you won’t need to save anywhere else, but if you’re like me and in the middle of a fat debt, and you want to save for retirement, then may I suggest that you keep $1000 as an emergency cushion. No more, no less. Just $1000. That way, if anything happens (meds cost $300 unexpectedly), you can dip into it and not have to resort back to debt/credit cards, and dig yourself further and further into the neverending black hole.

But once you dip into that $1000 Emergency Fund, you have to replenish it. If you have to take money from your normal retirement savings plan just to make it go back up to $1000, then do it. I don’t mean take the money OUT of your plan that you’ve already put on, but let’s say you were going to pay $100 towards the plan this month. And you had to spend $300 on meds. Take that $100 that you were going to pay towards the plan, and put it back into your savings fund, until 3 months later, it’s back up to $1000. This emergency fund is NOT to be touched for the sake of buying new shoes, or anything frivolous. When I say emergency, I mean E-M-E-R-G-E-N-C-Y like if your air conditioner breaks down, your car breaks down, your kid loses his only winter coat in the middle of winter, and you need to buy him a new one ASAP (Tip: try a thrift store, the clothing is clean and quite decent), because you hadn’t counted on him losing his new coat that you just got him. Trust me, that $1000 may seem like a LOT to save up, but it’ll give you a peace of mind like no other.

My $1000 fund is there for me, if I need it for ANYTHING, and I’m glad to have it, if not my budget would have to be disrupted and messed up for 3-4 months while I scramble to financially pinch pennies and fix it, but now, if anything happens I have my emergency fund that I can dip into it when I need it. You don’t even need to keep that $1000 in your bank, earning 4% (although it would be nice to get $40 a year just for making sure you have a backup cushion), but you can even keep it in cash, hidden somewhere in your house, maybe in a picture frame behind a picture at the back of a closet, behind heavy coats or cans of food, where you can access it ASAP but not so easily that you’ll be tempted to dip into it.

Side note: If you’re wondering where/who offers a 4% interest savings accounts (gosh we Canadians are sure far behind the Americans and their 6% accounts available in the US… anyway), you can basically go to every company website, click on SAVINGS or BANK ACCOUNT, and look for the fine print with the interest percentage.

ING Direct is offering 4.25% as a teaser offer until the end of Aug (I think), but then after that it goes back down to 3.5% as the standard interest rate. Uber easy to sign up for. They’re like a PC Financial but I think I might switch my high interest savings account from PC to them or open an account with ING as well, and keep $1000 there too (not sure what I want to do yet), because 1% versus 3.5% as a rate if you dip below $1000 is a bit ridiculous.

PC Financial is offering a permanent 4% Interest Plus Savings Account (uber easy to sign up for if you are already a customer but you need to keep a balance of at least $1000, if not you only earn 1% instead), and every anniversary that you keep the account, you gain an additional 0.03% on top of that 4%, and it also varies depending on the level of cash you’re keeping. So if you keep $10,000 or more, in 4 years your interest rate will go up by an additional 0.25%, but if you keep only $1000 or more up to the next level, your interest rate will go up by 0.06%. But really, if you have $10,000 or more in the bank, I’d throw it into bonds or liquid investments and get a better return than 4.65%. But I digress.

Another bank that might be good to try is ScotiaBank. But other uber major banks like TD or CIBC may charge you a fee if you DON’T keep a minimum balance (I have no clue, I wrote them off years ago when they tried to take $10 every month from my account because I didn’t have $1000 as a minimum balance in there).

Go forth, research and ASK ASK ASK.