(Special) – It’s a familiar story. When you’re younger and just starting out in adult life and your career, saving is a low priority. You work, start to raise a family and maybe buy a house. You’re inundated with demands for your money – rent, a mortgage, living expenses, a car.
Then as you age and the prospect of retirement begins to appear on the horizon, you start to think about saving for your older years. Many people don’t start building their retirement assets until 10 or 15 years before they plan to retire.
“Before the age of 40 it’s hard for people to get a realistic sense of their retirement,” says Michael Dorfman, portfolio manager and managing director of BMO Nesbitt Burns. “Some people may be more diligent than others, but we recommend people start saving as early as possible because of the power of compounding.”
According to Investopedia, a 25-year-old who wishes to accumulate $1 million by age 60 would need to invest $880.21 each month assuming a constant return of five per cent. A 35-year-old wishing to accumulate the same amount by age 60 would need to invest $1,679.23 each month using the same assumptions.
Ten years later, a 45-year-old would need to invest $3,741.27 each month to accumulate the same $1 million by age 60, almost four times the amount that the 25-year old needs.
Starting early is especially helpful when saving for retirement. Putting aside a little bit early in your career can reap great benefits.
Dorfman suggests people set up a systematic savings plan where a certain amount of money is automatically taken from your paycheque and deposited or invested into a separate account or, if you have one, into an employer sponsored pension plan, which may including matching contributions from the employer.
“People should definitely maximize the advantage of any matching contribution plan with their employer,” says Dorfman. “You’re allowed to contribute up to 18 per cent of your salary. Maximize what your employer will allow you to contribute and then put the rest into a private plan. The key is start as early as you can to take advantage of compounding.”
For the less disciplined many financial institutions offer RRSP loans at better rates to help people borrow to make contributions. Most financial experts will advise people to take their tax refunds and use it to immediately pay down the loan.
Many RRSP owners wait until the first 60 days of the year to meet the contribution deadline for the previous tax year. However, by contributing throughout the year you can increase growth and compounding.
You also may continue to contribute to your RRSP longer than you think.
You can contribute up to and including the end of the year in which you turn 71. Once you turn 71 you have until the end of that year to mature your RRSP.
Even though you may no longer be able to contribute to an RRSP yourself, you are entitled to the tax deduction for your contributions to your spousal RRSP.
And if you still are working at age 71 you will still generate RRSP contribution room for the following year.
Depending on your financial situation and tax bracket, a Tax Free Savings Account may be a better second option to an RRSP.
If you are in a lower income tax bracket and can’t take full advantage of the tax deductions available from an RRSP, contributing to a TFSA may be better. A financial adviser can help you determine which option is better for you.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.