It’s a familiar story: an expert on TV or in a newspaper sounds the alarm about Canadians not saving enough for retirement. The message is, “Start early or you’re sunk.” While starting early is great advice for those in their 20s or 30s, if you’re pushing 50 and haven’t started saving, you probably feel frustrated and nervous about your financial future. You’re not alone. 48 per cent of Albertans saving for retirement say they are behind on their retirement goals (ATB Investor Beat, January 2016).
The fact is it’s never too late to start. Your RRSP enjoys tax-free investment growth until age 71, so even if you’ve recently hit the big 5-0, there are still many years for you to grow your retirement savings.
At age 51 you still have 20 years of tax-deferred growth for your RRSP. This means that you don’t have to pay tax on your contributions or the interest until you take it out, preferably when you’re retired and your tax rate is much lower.
The beauty of compound returns
The “7-10” guideline can help you see the potential. If your investment grows 7 per cent each year, your money will double in 10 years. Conversely, if your investment has a 10 per cent annual return, your money will double in seven years.
When it comes to RRSPs, your contribution room has been piling up since you got your first job, so a large, lump-sum contribution is possible. Of course, a large lump sum RRSP contribution will generate a nice tax refund. Re-invest this refund and you will be well on your way.
Try a TFSA
If you aren’t eligible to contribute to an RRSP, or have very little contribution room, you have another option: a Tax-Free Savings Account (TFSA).
Available since 2009, TFSAs have become a popular alternative to RRSPs because you don’t pay tax when you withdraw the money. With annual contribution limits, your TFSA may not provide enough contribution room to fund your retirement on its own.
If you need help catching up on your retirement savings or creating a plan, contact a financial advisor.