In this weeks blog post, we continue with our finance tips series. In previous weeks, we have already covered the millennial’s, and the young parents. This week we move to the next step in the earnings life-cycle: Peak Earning Years.
This stage in life usually comes between the ages of 40-55. At this age people are usually quite developed in their careers, their kids are growing up or are self-sufficient already, and they are looking towards their future retirement.
Between the ages of 40-55 is when the majority of people will be pulling in their largest incomes and working a significant amount of hours. It is a great life stage to solidify what your future can look like and if your goals and dreams are realistic.
A great way to achieve any long term financial goal is…
Avoid Life-Style Creep
When you first entered the working world, you probably weren’t making as much money as you are now. At that point in your life it was fairly easy to not spend a lot. Partly because you didn’t have a lot of money to spend.
Life-style creep is the idea that as income goes up, your spending and expenses go up proportionally. You might now make $30,000 more, but your spending and/or expenses increased by the same amount.
If life-style creep takes effect in your life, it is a lot harder to keep up nevermind get ahead. Although income grew significantly, savings didn’t grow much or at all.
Another con to life-style creep may come in the form of uncomfortable adjustments to, and potential decreases in, standards of living and spending when entering retirement. Spending a lot and having life-style creep can create bad savings habits, leading to a future where compromises are likely to be required.
Peak-earning years is a great time to put away the extra money you’re earning. Since there is still quite a bit of time before you retire, compounding interest still has a significant time to work it’s magic.
Increase Monthly Contributions
Rather then succumbing to life-style creep, what should you do with the extra income? Increase your monthly or annual contributions to your savings and investments.
Increasing your contributions in your peak earning years will help to ensure your nest egg is big enough during retirement.
Interesting fact: if the market performs its average annual returns of roughly 7%, money doubles approximately every 10 years. If you’re in your peak earning years, you likely have 10-20 years to retirement. In that amount of time your money could potential double, triple or even quadruple.
Now that you’re finally making more money, you can top-up your Tax Free Savings Account (TFSA). If you not sure what a TFSA is, or why you should top it up, read one of our previous blog post: 4 Reasons to Max Out Your TFSA.
If you have already maxed out your TFSA, that brings us to our next point…
Take Advantage of other Tax-Sheltered Investment Vehicles
Their are several Tax sheltered accounts available (RRSP, RESP, and work pension/LIRA). The most common ones are RESP and RRSP. We talked a little about RESP’s in one of our previous posts (Finance Tips for The Young Parent), so we are going to focus more on RRSP’s.
The Registered Retirement Savings Plan (RRSP), is a tax deferred investment account. When contributions are made to an RRSP or Sp. RRSP (Spousal RRSP), you receive a tax deductible expense for your income tax return.
Amounts contributed to your RRSP come off the top of your gross taxable income, and are deferred until the future. When dollars are withdrawn in the future they are added to your taxable income in that respective year.
The idea here is to draw out of your RRSPs when you are in retirement and no longer have employment income.
Instead of using all your available RRSP room when you are younger, save that contribution room for later in life. We suggest this because at a young age you are probably earning less income and paying minimal tax.
However, when you advance in your career and start earning more, you will also be edging into the higher tax brackets and paying more income tax. Since you didn’t use that RRSP room when you were younger, you can now contribute more and get a bigger “bang for your buck”.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy.
