It’s tough to think about retirement when you’re 25.
In those early earning years, you’ve got plenty of other things on your mind: paying off student loans, finding a place to live, traveling the world. As you hit your 30s, new priorities take centre stage, like buying a home, building your career or saving for your children’s education.
But even though retirement might seem a lifetime away, putting off RRSPs savings until you’re in your 40s or 50s can really cost you in the long run.
“When you wait until you’re closer to retirement to contribute to your RRSP, you’re really having to play catch-up,” says Marie C. Blanchet, Senior Consultant, National Bank of Canada, Financial Planning. “And the budgetary confinements can become even greater. The fact is, a 40-year-old has just as many financial obligations as a 30-year-old, sometimes more.”
Though you may think you’re too young to worry about your retirement, saving early can give you a valuable head start.
When the Canada Revenue Agency (CRA) established the rules around RRSPs, they determined that a person who saved 18 per cent of his or her income for 35 years would accumulate sufficient funds for his or her retirement. That 18 per cent, when combined with social retirement programs like Canada Pension Plan and Old Age Security, would allow a person to enjoy 70 per cent of the gross earnings he or she earned before retirement. (This is why we get an RRSP contribution limit of 18 per cent of our earned income each year).
For an example of how this concept would work, consider Brian, an average Canadian with an employment income of $50,000 since age 25.
If Brian saved 18 per cent of his income starting at the age of 30, he would have accumulated $1,085,446 by the age of retirement, assuming a rate of return of 4.25%. (Note that Brian’s wages were indexed by inflation of 2.25%, increasing to $121,759 by the age of 65).
Because he began saving at age 30, Brian will have put aside almost 9 times his annual income by the time he retires.
Consider, however, the situation if Brian decided to start saving for retirement later in his life, when he turned 40. In order to reach that same goal of $1,085,446, he would have to put aside a higher percentage of his income -- 28% in fact. And if he put off saving until even later, age 50, Brian would have to allocate almost 52% of his income to savings in order to achieve his desired goal.
If Brian found himself unable to make the lifestyle changes necessary to put aside half of his income, he would have to accept that he would end up with less income when he retired.
For example, if Brian found that he could only manage to save 18 per cent of his income, starting at age 40, his future RRSP balance would only be $697,213, or 64% of his ideal goal.
And if he started saving that same 18% at age 50, Brian’s future RRSP balance would be $377,350, or 35% of that goal.
With these figures in mind, it becomes clear that saving at an early age is a more effective way to ensure that you will be able to meet your retirement goals. In addition, saving early will minimize the impact on your day-to-day finances in the long run.
Still, it can be challenging to balance retirement goals with the other financial priorities in your life. To find out what strategies are available to you, consult with one of National Bank’s experienced financial advisors. Your advisor can help you find a way to save for your retirement without putting a strain on your finances.
For example, one effective strategy is starting systematic savings plan, so contributions towards your RRSP come out monthly, instead of a large lump sum right before tax time.
“A systematic savings plan is one of the best ways to start saving early,” says Ms. Blanchet. “With a smaller amount every month, you don’t see it, you learn to live without it and you learn to work your budget and your expenses around it.”
Whatever your stage in life or financial situation, it’s never too early, or too late to talk about your retirement. Your National Bank financial advisor can help you determine the best way to reach your retirement goals, while still living your life in the meantime.