Saving for a Sunny Day – Registered Retirement Savings Plan (RRSP)

The news has been full of the changing patterns of retirement given increasing life expectancy. Now with life expectancy well over 80, people need to plan for 20-30 years of retirement. This requires significant savings – a great first step is an RRSP. Essentially you get a tax credit for putting money away for your retirement. For most people you can contribute 18% of your salary to a maximum of $26,010.

Nothing is free: Registered = regulated by the government. So in exchange for the tax credit you can’t access your money until you retire (keep reading below).

Take these steps:
1. Open an RRSP – at a financial institution or through your employer
Bonus: find out if your company has a contribution matching program
2. Calculate your max contribution (salary*18% – or specifically
3. Set up an automatic contribution from each pay cheque

If you still aren’t convinced here are a few benefits

Forced savings
Once you put your money in your RRSP it is locked in until retirement. If you are prone to dipping into your savings or need extra accountability you have found it.

First home
If you are a first time homebuyer you can take $25k out interest free for 15 years. An awesome down payment … unless you are buying in Toronto or Vancouver… you may need a little more.

Tax deferral
Save the tax on your savings. If you put money in your RRSP you don’t need to pay tax on that income until you take it out in retirement. Say you put in $10k you save the 40% tax you usually pay. In this case you would have an extra $4k to invest now – anyone remember compound interest LINK?

When you do take the money out you will pay taxes at your retirement rate – usually lower than your working tax rate. If you make $100k now and $75k in retirement the money you take out of your RRSP will be taxes at the $75k level.

Links
The economist on the increasing years of retirement

Max RRSP contribution – for you specifically

Index funds are a simple and effective way to diversify your RRSP

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