Put away an RRSP nest egg for yourself
Even if you start small, compound interest adds up
Wednesday, Feb 05, 2014 06:00 am
Want to be a millionaire in your old age? It's possible, if you are diligent about squirrelling away cash into a Registered Retirement Savings Plan so that it compounds for you.
If you begin early enough – say at age 18, and you manage to put away $4,000 per year into an RRSP, by age 65 you would have at least $964,000, and likely more.
"If an 18-year-old started with $4,000 per year he would have a million dollars for sure, because he had established saving habits early, and quite likely would put more than $4,000 away as his earnings increased. He would have that RRSP in addition to his pension," said Laszlo Szojka, an investment broker with W.D. Good Investments.
That's well and good for the 18-year-old, but what about the rest of the adult population? No matter what age you are and what your income is, why use an RRSP in the first place?
"It's taking advantage of tax deferred money. Your money is sheltered from tax and in addition, every year the government allows you to keep that money in an RRSP without paying tax on the interest you make. So your entire time – your entire working life – your money is making money for you," said Adam Klauwers, a financial consultant with Edward Jones.
The $1 million formula is easy to figure out, Klauwers said, once you understand the magic of compound interest.
"At age 25, if you put $381 every month into an RRSP, at 7 per cent, you will have a million by age 65. If you don't start until you are 35 years old, you will need to put $820 a month away because you have 10 fewer years of savings. At age 45 you will need $1,920 per month," he said.
Even if a million dollars seems out of reach, both investment brokers stressed the need to put something away, even if it's a small amount and the earlier you start, the better.
The rule of thumb is to put at least 10 per cent of your income into an RRSP, Szojka said, and that formula is a good one, all through life.
Most 18-year-olds will be starting post secondary education but many will still have part-time employment. They should consider establishing an RRSP plan.
"Even if they put $25 a month away, it will start to compound and every 12 years it will start doubling," Szojka said.
The average age to start climbing out of debt is between age 32 and 34, Szojka said.
"You need to remember to put yourself first. The first bill you pay every month is that 10 per cent you pay yourself," Szojka said.
Even the person whose credit cards are maxed out should consider an RRSP Szojka said.
"There is no instant solution. People are used to microwaving their food and getting it instantly but that won't work with debt. But if you file an RRSP, you should realize a tax saving when you file your income tax and then you put that savings towards the debt. You reduce your debt, you save on your taxes and you have put money away for your future," he said.
By age 40 people need to start considering when they want to retire and they should examine their own health as well as that of family members. Do you come from a long-lived family or do you come from a family where everyone dies relatively young?
"This is the age when people have divorce issues, they may have illness, they may change jobs, they may go back to school, they may be paying for their kids' education. They need to start looking at where they want to be when they retire and they need to plan for it," Szojka said.
Having a financial road map is equally important for the 50-year-old.
"This is the age when you really need to focus on your lifestyle. Are you the kind of person who enjoys working and may want to work past age 65 or do you want to see the world? This is the age and on into your older years when you realize it just takes one little thing – an illness or maybe an accident to change everything. You are just one little thing away from change so you need to enjoy life. You should plan so that when you retire you are free of debt and you have an income to do the things you want to do," Szojka said.