If you’ve ever wondered when the best time to start saving for retirement is, it’s as soon as you can. Starting early can make a big difference in how much you’re able to save over time.
Why start saving early?
The earlier you start saving, the more time your money has to grow. This growth can happen because of compound interest. Over time, the interest you earn gets added to your savings, and you begin earning interest on your interest. Even small contributions can grow into a significant amount if given enough time.
Let’s look at an example.
Sarah, begins saving for retirement at age 25. She contributes $200 per month to her RRSP, earning an average annual return of 5%. Sarah will have saved about $297,713 by the time she turns 65. She’ll have an approximate annual income of $21,123 for 25 years after she retires.
John, on the other hand, waits until he’s 40 to start saving for retirement. He contributes $400 per month to his RRSP, also earning an average annual return of 5%. John will have saved about $235,248 by the time he reaches 65. He’ll have an approximate annual income of $16,691 after he retires. John’s savings are lower because he had less time for his investments to grow.
How to start saving early
Starting to save for retirement early can make a big difference. Here are some ways to get started:
Pay yourself first
Treat savings like a bill; something you must pay every month. Set aside a portion of your income before spending on anything else.
Automate your savings
Set up payroll deductions or automatic transfers to a retirement savings account like a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). Even smaller payments if you can’t make larger lump-sum contributions can add up. This can make saving feel more effortless and may help you stay on track with saving better.
Take advantage of employer matching
If your workplace offers a retirement plan with matching contributions, try and contribute enough to get the full match.
Cut back on extras
Look at your spending and see where you can save. Small changes, like eating out less or skipping impulse buys, can add up over time.
Choose the right investments
Think about your risk tolerance and how comfortable you are with market ups and downs. Your advisor can help you build a plan that fits your investment goals.
Starting to save late? Stay balanced
If you’re getting a late start on saving for retirement, don’t take on too much risk or be overly aggressive with your saving strategy just to catch up. A steady, well-planned approach is better than chasing big returns.
Create a retirement plan
Saving for retirement is easier when you have a plan. Start by estimating how much money you’ll need. Think about your lifestyle, potential expenses, and when you want to retire.
Once you have a goal, break it into smaller steps and decide how much you can save each month. You can also use a retirement income calculator to find out how much your registered savings plan could give you when you retire.
Consider speaking with your advisor to help you create a plan tailored to your needs.
Save earlier to keep up with inflation
It’s important to think about inflation as well when you’re starting to save for retirement. With the rising costs of things like food, housing, healthcare, and transportation, combined with the reduced buying power of your savings over time, you’ll most likely need more money in retirement than you think.
The earlier you start saving, the more time your money has to grow and keep up with inflation. Even smaller contributions now can make a big difference later, which may help you maintain your lifestyle and avoid any financial stress in your retirement.
Continue reviewing your savings as you get older
The sooner you start saving for retirement, the better, but it’s never too late to adjust your plan.
About 10 years out from your retirement, review your savings and estimate your retirement needs, and work to pay down debt. You can use a retirement income calculator to help you find out how much your registered savings could give you in your retirement.
At about 5 years out from your retirement, consider shifting to lower-risk investments and maximize contributions to your RRSP and TFSA. With 3 years left to go until your retirement, test your retirement budget and plan for health care costs. You could consider something like Freedom to ChooseTM health and dental insurance as a personal insurance policy in retirement.
Finally, in the final year before your retirement, decide when to start withdrawing savings and consider converting your RRSP to a RRIF. Your advisor can help you create a plan that works for you.