Home »
The magic of compound interest and RRSPs
By Colin J. Campbell
Every year when February rolls around, we start thinking about filing our taxes and of course it is the last month for Registered Retirement Savings Plan contributions to reduce 2014 taxes.
The final contribution date for 2015 is March 2. The contribution limit is 18% of 2013 income to a maximum of $24,930.
Contributing to an RRSP does two things. 1. It reduces net income for tax purposes and reduces tax. 2. Saving for retirement in a tax sheltered investment means that capital will grow faster than in a non registered investment.
Albert Einstein said that the magic of compound interest was the eighth wonder of the world. The best way to understand this is to apply the rule of 72. The rule of 72 states that whatever the interest rate the investment will earn divided into 72 determines how many years it takes to double the investment. Ie if you earn six per cent it takes 12 years to double the original investment.
When this rule is applied to retirement savings and there are consistent annual contributions to the retirement plan the impact of compound interest can be quite startling. Saving $200 per month from age 20 at six per cent interest will accumulate over $500,000 at age 65.
The problem with retirement planning is time; we often don’t make those consistent monthly contributions and every year delayed means there has to be more invested to make up for lost time or we have to consider an older retirement age. Waiting 20 years to age 40 to start saving means the contribution to accumulate the same $500,000 will have to be $800 a month.
However, it is never too late to start; whatever the age it is the first day of the rest of our lives and it is possible to make up for lost time. Whatever doesn’t get deposited in an RRSP is going to Revenue Canada anyway, it just makes sense to take advantage of the system and begin to save.
Call a financial advisor today and start saving for today it will make all the tomorrows much brighter.
– Colin J. Campbell, CFP, CLU, is managing partner of Guidance Planning Strategies Ltd. in Cranbrook. Guidance Planning Strategies Ltd. is an independent insurance and mutual fund broker that specializes in helping families and entrepreneurs create wealth and keep it for generations. [email protected]
