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Doing the RRSP math, so you don't have to

young woman looks at piggy bank

We've all heard about the power of compounding and why it's important to start saving for retirement early. But how much of a difference can 10 measly years make?

A recent release from the Bank of Montreal said the difference between starting a Registered Retirement Savings Plan (RRSP) at age 30 and opening one at age 40 can be nearly $1-million.

If you are math-averse and wondering how much your stalling is costing you, The Globe & Mail has a couple of online calculators that can help you figure out whether you are saving enough to have the retirement of your dreams.

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The first, A Tale of Two RRSPs, looks at how your RRSP total will be impacted by contributing earlier versus waiting longer and how it will change depending on what time of year you make your contribution (yes, that matters). It also shows how earning a slightly higher rate of return – 1 to 2 per cent – can make a big difference in the long run.

You can use the calculator to compare the growth of two RRSPs using five variables: the rate of annual contributions, what time of year you contribute, your rate of return, at what age you started to contribute and at what age you plan to retire. Plug in these numbers and presto, there is your answer.

The second calculator, Will the money last?, will let you know how long your money will last if you make regular yearly withdrawals. You can compare two withdrawl scenarios, looking at them side-by-side by plugging in various rates of return and withdrawl dates. It should at give you a pretty good sense of whether you have saved sufficiently for your golden years.

BMO, whose tip of the week was to open an RRSP early and to contribute to it regularly, offered this advice to investors:

  • Start off investing small amounts and gradually increase them as the years progress; this will help raise the value of your RRSP. Increasing your contributions as your salary rises through the years is a great strategy that can help boost your RRSP savings.
  • Investing consistently over a longer period of time can benefit your portfolio, even in times of market volatility. As you are purchasing more shares when prices are low and less when prices are high, your average return will be greater than if you invested all your money at once.
  • Pre-authorized payment plans, through automatic payments from your paycheque or bank account, are an effective way to ensure regular contributions are made to your RRSP account and you're saving on a regular basis.
  • A financial professional can help you develop a strategy for making regular RRSP contributions that work for you.

For tips, stories, videos and live chats ahead of this year's RRSP contribution deadline, check the Globe Investor 2012 RRSP season website for daily updates.

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