The impact of pension reform has sparked enquiries about how to go about earning a comfortable retirement earlier, preferably around 55 years old – give or take five years.
The short answer is to establish a personal retirement fund in order to reduce dependence on a National Insurance Scheme pension or a company pension.
The earlier in one’s working career that even the smallest of regular savings can be invested, the easier will be the burden of accruing a sizeable fund in the long term, drawing on the time value of money.
Here then are practical saving/investing approaches:
Voluntary contributions, if allowed, may be made to your employer’s pension scheme. Currently, you may make voluntary contributions up to a specified maximum amount free of income tax. However, this fund is not accessible to the worker until retirement.
Retirement savings can be made with an insurance company by purchasing a registered deferred annuity. This amounts to purchasing an insurance policy that is registered with the Inland Revenue Department, and that will guarantee an income in equal periodic amounts at some future time.
Registration requires that the payout period of the annuity cannot be planned for before the purchaser is at least 60 years old. Once registered, a maximum of $4 000 in annual premium is allowable as an income tax deduction.
Retirement saving can be made through a registered retirement savings plan (RRSP) where up to a maximum of $4 000 saved annually may be tax deductible.
The RRSP can be attractive to workers even at the start of their work careers, as one early withdrawal is allowed from the fund provided that it does not exceed $25 000 and that the funds withdrawn are invested in a first home for the RRSP owner. Just like any other registered product, no other tax-free withdrawal is allowed until age 60.
Government savings bonds may be purchased at a discount, maturing to face value usually over a five-year period.
There are three main attractions of this saving vehicle: first they are Government paper secured by the Consolidated Fund; so the Government would have to go broke for the investor to lose his investment.
Secondly, the interest earned on an amount not exceeding $50 000 from any one issue of bonds is tax-free. Then, Government bonds can readily be converted to cash at the bank at any time during the life of the bond with only the prorated amount of interest being payable.
Savings towards retirement may also be invested in the stock market. As current results are showing, this can be a very risky undertaking yet there are possible high returns, given the high risks.
This is not a highly recommended option for anyone within ten years of retirement. This is because one’s principal investment, if lost, becomes virtually irreplaceable as the end of one’s work career draws nearer.
Some mitigation of risks may be offered by accessing the equity market through a mutual fund. Investment returns would also be expanded by the tax allowance provided for investing in mutual funds or in the newly issued shares of a public company. Up to $10 000 per year so invested can be deducted from taxable income for the related year of purchase.
So should you wish to retire early, plan to suit: start as young as possible, save as much as possible; invest prudently; and exploit tax incentives as much as possible. Maybe then you will be able to retire at 50!
