Here are the stories of three investors who began saving at different stages of life. All have the same goal: to have a yearly income of $35,000 when they retire. About 40% of that will come from their own Registered Retirement Savings Plan (RRSP) savings; the rest will come from their company and government pensions. If their money grows at the rate of 6% each year, what will they have to save to reach their goal by age 65?
Meet Annette, the early bird
Annette began saving small amounts in her RRSP when she got her first full-time job at age 25. Now, at age 30, she has $21,000 saved. How much does she have to save each year to make her goal by age 65?
Annette's savings goal: A little over $4,300 a year (or $360 a month). That amount will get easier and easier to manage as her income goes up over the years.
Meet Andy, the late starter
At 35, Andy opened his first RRSP. He was never able to save more than $7,000 a year. Now, at age 45, with only $80,000 in his RRSP, he's getting worried. To catch up, what does he need to save in his RRSP each year?
Andy's savings goal: A little more than $6,500 a year (or $540 a month).
Meet Andrea, the catch-up queen
Like Andy, Andrea was also 35 when she started saving for her retirement. She went at it seriously, though, putting into her RRSP the most she was allowed each year. At age 55, she has $200,000 saved. What should she save each year to reach her income goal when she retires?
Andrea's savings goal: About $4,600 a year (or almost $400 a month).
As these examples show, if you start early you can save less each year and still reach your goal. Of course, everyone's situation is different. Annette, Andy and Andrea need to get only 40% of their retirement income from their RRSP. If your government or company pension benefits are less, you will need to save more. And, if you have no company pension, you will need to provide most of your retirement income from your own savings.
Tip: Use our to help you figure out how much money you'll save by the time you retire.
What if you can't start to save for your retirement as early as you would like? What if you have other priorities, such as paying off debt first? There are still a number of ways to catch up.
Here are seven tips for last-minute savers:
- Take advantage of any additional catch-up contributions you can make to your Registered Retirement Savings Plan (RRSP). The government allows you to carry forward unused contributions each year and make them later on.
- If you're already maximizing your RRSP contributions, save any extra money you can in other investment accounts.
- Don't overlook small ways to save, like cutting back on your spending for items like lottery tickets, magazines or fancy coffees. In fact, some people call this the latte factor. It all adds up! It's better to live on a little less now, so you can save more for when you?ll really need it.
- Take full advantage of your company pension or retirement savings plan, especially if it offers matching contributions.
- Next time you get a bonus or raise, don't spend it all. Try to put a good chunk of it toward your retirement savings.
- If you have to choose between saving for retirement and your kids? college education, put your RRSP first. Let your kids get jobs or borrow for college. Later, you may be able to help them pay off the loans, which carry low interest rates.
- Revisit your investment strategy and look for ways to get a little more growth without more risk than you can tolerate. If you choose only the most conservative investments for your retirement savings, your savings may not grow fast enough to give you the income you need after you retire.
Remember: The important thing is to get started
Even if you start late, you may be able to catch up by saving more in the years ahead. Also don't forget, if you can't put the full amount allowed in your RRSP one year, you're allowed to make up the contributions you missed later.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.