At this time of the year, it seems like everyone is talking about registered retirement savings plans, or RSPs — why you need one, where to get one, how much to invest. But if your retirement is decades away, do you really need to start an RSP now? Plus, if you only have a little bit to save, is it really worth it?
Absolutely. RSPs have been helping Canadians get ahead for over 50 years and it remains one of the best savings tools available to you today. The primary reason is that the money you invest in an has the opportunity to grow tax-free. This acts as an accelerator for your savings because you don’t have to pay any tax on your investment income or appreciation until it’s withdrawn. The result is that your money can potentially grows much faster. But when is the right time to start? I remember a conversation I had when I was 19 years old with a lawyer friend of my dad’s about the importance of planning for retirement, simple ways to do it and the concept of an RSP. This is what he told me:
Time is on your side. If you start early, an RSP makes up for your lack of money by working with something you do have — time. Even if you can save only a small amount each month, time will make it grow. Suppose at 35 you start putting $1,000 into an RSP at the end of every year, and earn 6% interest on your contributions. By 65, you’ll have around $102,000*. Not bad! But what if you started 15 years earlier, when you were 20? You’d have more than $300,000*!
Take small bites. It can be daunting to find a chunk of money for your contribution before the annual deadline (which this year is March 1). Although there is nothing wrong with investing once a year, it is likely less painful to save for your RSP throughout the year. Just $20 a week, set up through an automatic withdrawal plan from your bank, could have you saving $1,000 a year in an RSP — and that can really add up.
Take advantage of the give-back. Any money you put into your RSP is subtracted from that year’s income when the government figures out how much tax you owe. If you have a regular job, and your tax rate is 32%, putting $1,000 into an RSP saves you $320 in taxes. The savings alone are a great incentive to have an RSP!
* Indexed to an annual inflation rate of 2%.