It’s RRSP Season in Canada, here’s why you need to start saving now.
It’s RRSP Season, and here’s why you should contribute NOW.
It’s February in Canada, which means it’s RRSP season once again. Every year we can save money in RRSP’s, and receive a tax deduction for our contributions. The tax deduction alone makes this a great thing, but it’s not the only important part of your retirement savings.
What is possibly the biggest factor in your retirement savings isn’t your interest rate earned, or your investment strategy. It’s your TIME. Starting to save earlier has a huge impact on your end goals – far more than most people realize. Let me illustrate.
Let’s take Canadian RRSP contributions people A and B. Both are 20 years old. They earn 5%.
Canadian A saves $1 each year from ages 20-29 (so for 10 years).
Canadian B saves $1 each year from ages 30-64 (so for 35 years).
How much do they have at retirement? Get ready……almost the same amount. At age 65:
Canadian A has $91.
Canadian B has $94.
No substantial differences in their retirement lifestyle between those two numbers.
Now lets see what happens if they both earn 7%:
Canadian A has $207.
Canadian B has $147.
Canadian A, who started early and only saved for 10 years has noticeably more money at retirement than B who saved for 30 years.
The point? Start saving now – today. Don’t wait another year. The time factor in long term investing is huge.
But there’s another hidden point here – fees on your investments. Let’s compare A and B, but against themselves at different interest rates.
Canadian A earns 5% until retirement. At retirement they have $91.
Canadian A earns 7% until retirement. At retirement they have $207.
Wow. I’m not going to advise you on how to ‘pick’ investments focused on higher returns, because higher returns alone is bad (you need to balance returns with risk). But there’s a relatively easy way to increase your rate of return on your retirement savings.
The answer is fees. Mutual funds and similiar investments charge fees on your savings. We’ve already seen this comparison but lets look at it again.
Canadian A earns 7% and pays 2% in fees. Ultimately they are earning 5%. At retirement they have $91.
Canadian A earns 7% and pays 0% in fees. At retirement they have $207.
In this example, if they eliminated 2% fees, they would more than double their retirement savings for the same amount of money they deposited into their retirement savings. That’s almost unbelievable – but it’s also true. This is why unbiased experts and Canadian financial advocates recommend that you attempt to minimize fees on your retirement savings.
The 2% difference in fees isn’t an arbitrary example. Mutual funds often charge in that range, while other investment types may offer fees closer to 0%. Shop around and make sure you’re paying the lowest fees available.
Here’s the summary. Start saving now, right now. Doing so will have dramatic impacts on your retirement lifestyle. And watch your fees, small fees can have a huge impact on your retirement as well.