Procrastination is opportunity’s natural assassin.
Victor Kiam apparently said that. The late U.S. businessman was famous for appearing in ads for Remington, his electric-razor company.
Many financial advisers also would probably like to say this to their clients when discussing RRSP contributions. Procrastinate now and watch your retirement goals fade later.
But even the most diligent savers sometimes have to temporarily halt their RRSP contributions. The house needs new plumbing. Relatives on the far coast need to see the kids. How can the conscientious among us weigh the impact, both quantitatively and psychologically, of not contributing to retirement savings?
Let’s say your regular annual RRSP contribution is $2,000, suggests Sandi Martin of Spring Personal Finance in Gravenhurst, Ont. The growth of the investment and the ability to defer tax until retirement is the whole point of an RRSP, she points out.
“Obviously you need to think of the compounding power of that $2,000,” and the benefits of paying less taxes on $2,000 in income when you are in a lower tax bracket in retirement, she said.
Then again, if that $2,000 is more immediately needed for plumbing or plane tickets, most savers don’t consider adjusting their retirement goals accordingly. So they’re going to have to play catch up and contribute more later.
“In other words,” she says, “if you skip a $2,000 contribution now, you may have to save, say, $2,500 later.”
The rule of 72 is another easy way to calculate lost opportunity. If you divide 72 by the expected rate of return of an investment, you will get roughly the number of years an investment will take to double in value.
For example, if the rate of return is 7 per cent, an investment would be expected to take a little more than 10 years to double. “So if somebody procrastinates for 10 years, then theoretically they’re losing 10 per cent of their retirement savings potential for every year they procrastinate,” said Derek Moran, a financial adviser at Smarter Financial Planning in Kelowna, B.C. (A number of websites have tables based on different rates of return.)
Mr. Moran also noted that if a saver starts to invest early in life, less money is needed per contribution to reach a desired goal. Assuming a 6-per-cent annual rate of return, a person retiring at 65 could put in 58-per-cent less money a year if she started to save at 45 instead of 50.
“The concept or message remains the same. Starting to save sooner means less annual and total savings required to achieve a goal,” he said.
Not contributing can also start a spiral of negatives. “When you put off that year, you also put off the tax refund that comes. And there are a lot of other effects. That year might be a year when the market’s really low, and so you’re going to [miss] an opportunity to buy when the market’s low,” Mr. Moran said. “When you get out of the habit, it’s dangerous.”
Skipping RRSP contributions may also be a sign that a retirement plan needs some rejigging.
“Let’s say you have a genuine reason for starting later, not necessarily just procrastination,” said Ms. Martin. “Then you’re probably not the kind of person who can really afford to take on the greater [holdings in equities] that you should, to get the higher rate of return that you need to make up for your lost time.”
In other words, playing catch-up may mean gambling more on riskier stocks and other less-conservative investments.
Doing so may require a higher risk tolerance. “If you’re looking for a higher return, obviously you also have to have the appetite for a lower return, because your volatility is going to increase,” she said. And if those investments fall rather than rise, “then you’re really up the creek.”
The entire argument, though, comes down to affordability and cash flow. Can you make those RRSP contributions now?
Ms. Martin said, “If you’re putting $600 aside, and you’re also gradually increasing your credit card balance by something unnoticeable, like $75 or month or something, and if just you can’t quite get it paid down, then you haven’t spent enough time working on your cash flow.”