Don’t Miss RRSP Benefits: Tax Deferred Growth

Retirement income planning begins with the first dollar you save. That’s way RRSP season is important to young people, even though retirement seems too far away to worry about. But you should think about what lifestyle you are saving for and for how long your money needs to last between now and March 1, the RRSP tax filing deadline.

According to Statistics Canada, an average 50 year old in Canada is expected to work until age 66 before retiring; 3.5 years longer than the 50 year-old who retired in 1993 at the age of 62.5, this based on 2008 data. Considering the average life expectancy is 79 for men and 83 for women, this means the average retirement period will be 13 and 17 years for men and women, respectively.

That’s in a nutshell is what you are saving for. The big question is:  will you be ready to fund your future consumption with the savings rate you have today? If not, you’ll need to decide how much of your lifestyle you are prepared to give up.

Consider how much you need to save. In 2010, the average family income for elderly families was $56,200; for unattached elderly males the number was $33,800; females $28,500. The saving required to keep those levels of income up over 13 years for men, with a 2% inflation rate is $448,188; for women it’s more:  $494,190. Those are big numbers.

Yet, only 26% of eligible Canadians contributed to an RRSP last year, with a median contribution of only $2790 per year, leaving $633 Billion dollars of unused RRSP contribution room on the table—a figure that is not indexed for inflation. That is a shame, especially if you are young, because so much valuable tax deferred compounding time is being lost.

According to the Knowledge Bureau Registered vs. Non-Registered Savings Calculator, an annual contribution of $2800 would grow as follows:

Your Savings at Age 66 from Annual RRSP Contributions of $2800 at Various Return Rates

Start Contributions at: Age 25 Age 35 Age 45 Age 55
2% return $178,814 $121,036 $73,637 $34,754
3% return $226,865 $144,208 $82,703 $36,938
4% return $290.695 $172,764 $93,094 $39,272
5% return $375,849 $208,037 $105,015 $41,768
6% return $489,861 $251,691 $118,698 $44,436


It’s Your Money. Your Life. It’s clear: starting early makes a big difference; getting a great return on your investment does too. So does investing your maximum every year. Remember, the maximum allowable RRSP contribution per person for the 2012 tax year is 18% of your 2011 earned income to a maximum of $22,970; for 2013 the maximum dollar limit is $23,820 and for 2014 $24,270. To continue to have freedom of choice in retirement, go big on your savings plans.


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