How much to Your RRSP?
Posted by Gail | Filed under Retirement Planning, Saving
Are you planning on contributing to your RRSP for 2011? According to the Stats Man, only 31% of those eligible made a contribution in 2007, which totally blows my mind. The government is standing there waiting to hand you back the money you paid in taxes so you can pay down your debt, make a payment against your mortgage, fund your TFSA, or go on a family vacation and you’re going to let them keep it? Really?
Sometimes people think that if they can’t dump a lot of money into their RRSPs, it’s not even worth thinking about. Not true. Every penny you save today, is a penny plus growth that you’ll have when it comes time to punch out at work.
Put $25 a month into an RRSP, and give your money 25 years to grow at just 5% and you’ll almost double your money: you’ll have put away $7,500 but you’ll end up with $14,888.
Give yourself more time, and the results are even better. Let’s say you start contributing at 30 and do so until the normal retirement age of 65, you’ll have $28,402 just be socking away $300 a year. Com’on, you can find $300 a year.
If you can up your contribution to 2007 median RRSP contribution of $2780 and you give yourself 35 years, you’ll have $263,573. Yup, if you can trim your expenses back so that you can find $232 a month for your retirement savings, that’s how much money you’ll end up with. Not a b’zillion dollars… but nothing to sneeze at either.
And what if you were a little more adventurous and could earn even 1% more on your money? Well you’d end up with almost $67,000 more!
Don’t be sad about how little you can save today. And don’t let a small contribution stop you from starting. Find the first $25 a month, and grow your contribution from there. You can use your tax refund, part of your next raise, or the money you were wasting on some stupid habit to build a future. Plan now to start next month, and this time next year you’ll be all paid up!
December 16, 2011 at 7:56 am
We figure out, using a tax program, how much to contribute that will equal the same amount in a refund. That way, it doesn’t “cost” us anything. The refund we get, we put into an RESP for the kids. This way, we are saving for two causes, and paying once.
December 16, 2011 at 8:00 am
I should also say that when the statement comes in the mail that shows our allowable contribution room, I see that as a debt. I would love to see that number at 0. In a couple of years, my husbands should be there; got a ways to go on mine.
December 16, 2011 at 9:08 am
to anyone who has gone on mat leave and received top-up from their employer: did you contribute to RRSP’s or did you have extra taxes taken off to ensure you don’t have to pay additional taxes after your mat leave? I hear so many horror stories of how the proper amount of taxes aren’t taken off and then you end up having to pay $1400+ in taxes. I’d like to NOT owe, and I’m not sure if it’s best to have my employer take off additional taxes from my top-up or if I should contribute to RRSP’s to ‘make up’ the difference.
Any thoughts from anyone? I’m so new to this!! Thanks!
December 16, 2011 at 9:31 am
@ momma
I had an employer top up — Federal government, so it was very generous. I contributed to RRSPs as I do every year, and put extra money away for taxes. I did still owe on my taxes, even with the RRSP contribution. I didn’t need to use all the money I put away, but I felt good being prepared. When you are taxed on EI benefits and on your top up, each one taxes you as though they are your only employer. So, yes, another option is to ask your employer to keep taxing you as though you were earning your full salary. I just preferred to save the money myself in an account so that I earned the interest if I didn’t need it all.
Depending when in the calendar year you are on leave, you may be more affected during the year of mat leave, or the year after. My daughter was born in October 2009, and I felt more effect on my taxes for the 2010 year, when I had been on leave for 7 months, as opposed to the 2009 year, when I was only on leave for 2 months. (I took 9 months of leave, my husband took 3.)
Another note – if you keep up your pension contributions while on mat leave, as I did, be aware that the following year you will likely have very low contribution room for your RRSP. That’s because your pension adjustment will be the same as if you earned your full salary, but you only earn contribution room on your top up, not on the EI that is paid to you. So, if you’ll have less room to contribute in the year following mat leave.
One final baby preparation thought – while I was pregnant and on mat leave, we started saving up for daycare costs. We took about 3/4 of what we’d be paying for daycare out of our budget and saved it, to build up a pool to draw on when daycare started to subsidize the cost. Plus, it got us used to not having that money in the budget. We didn’t use it when my daughter was in home care, but now that she is in an excellent, but more expensive toddler program at a centre, we’re using some of that money to defray the cost until she’s a preschooler and the cost goes down.
Hope this helps! Good luck to you!
December 16, 2011 at 9:34 am
When you are living with the budget pie…. that 10% towards your savings….. What is the split between the emergency fund and your RRSPs? 5% to each until you have your 6 months pay saved up? Or 10% to emergency fund and don’t worry about RRSP until you have 6 months saved? How does that all work?
Please don’t say 10% to RRSP and magic money from elsewhere toward the emergency fund. That way leads to over spending when I can’t wiggle the other numbers to make it work.
December 16, 2011 at 9:46 am
I don’t own a home and I don’t have kids so I have no excuse. I max it out every year but this year I can’t. My bonus is partially being paid out in December and the rest is being paid out in January. I have to put it in next year but my husband and I are hopefully going to buy a condo so our priorities will also be to the mortgage. It’s just hard to get used to the fact that I will not have a huge refund like I do every year.
We both agree that 10% of our income should go to our RRSPs no matter what our life situation is so as long as we do that, we should be fine.
December 16, 2011 at 9:56 am
What happens when you get to 72 and have not drawn out any of the RRSP? If you still have a good income are you not just delaying the tax pain?
December 16, 2011 at 10:24 am
Ithink I put in about $1,000 this year, give or take. It’s not the best, but it’s certainly better than nothing. More went into a regular savings account because I wanted to keep it available if I needed it. Though I have recently stopped my RRSP contributions since going into business for myself. But I’m hoping to pick it back up again by the spring time.
December 16, 2011 at 10:55 am
I have been putting away $25/month since I was 18yrs, 23yrs now. I am planning on bumping it up just a little bit, what ever my comfort level, once all my debt is paid off and my emergency fund is up to my standards. I have been happy with my decision since I made it.
December 16, 2011 at 11:03 am
I’m in my early 40s so last September I upped my contribution by $320 a month. There were 8 months this year where I made no contributions because I was paying off debt. I have no dependants and now I have no debt so I contribute $450 a month towards my RRSPs and I will keep doing that.
I wish I could max out my RRSP contribution room but I need to save for my emergency fund (TFSA). So that is my focus at the moment. I have $26,000 left on my mortgage and of course I would also like to pay that down (gradually), and maximize my TFSA (later). Whew!
December 16, 2011 at 11:32 am
@Lisa – you can also include RRSP payments made in the first 60 days of 2012 on your 2011 income tax. You’ll get separate documentation if you make contributions in the first 60 days, and then you get to determine to which year you’ll apply the contributions.
I took quite some time to mull over RRSP contributions, since I’d been sold on the value of them years ago. In the end, I realized that I’m going to be making about the same amount after I retire as I am before I retire so maxing out my RRSP is not a priority for me. (I have income property, but some people just make very little money and will be in the same boat after CPP, OAS, and GIS). You need to figure out if you want to pay tax now or later – but eventually the tax man will get his. The more income you have when you retire, the fewer benefits you’ll qualify for.
Gail’s mentioned this before too, but for people in lower income brackets who expect to climb the earnings ladder into another tax bracket, you can make your contributions but just not claim them. So, only claim enough to take you down into a lower tax bracket, but keep the remainder for another year. There’s no point in going down to a lower tax bracket than you’ll be when you retire. For people in the lowest tax bracket, the TFSA is a better option.
The Services Canada website has a great feature that let’s you estimate your retirement income. You need to get an account set up first, but you can plug numbers in from company pensions, RRSP’s, etc. and the program will calculate the gov’t benefits you’re entitled to.
December 16, 2011 at 11:36 am
There are some people who should put their savings into a TFSA instead of an RRSP (lower income individuals) so that when they draw on the money for retirement, they aren’t clawed back on government benefits. While 70% of Canadians don’t fall into that income group, there are a significant number of people who do.
December 16, 2011 at 11:43 am
I am opened up my RRSP last week with a $1000 deposit and $100 from every paycheque will go in it. I recently paid off all my debt this year and taking that money I was using on my debt towards my TFSA for short term savings (wedding, travel etc), and into my RRSP. I am 27 years old and I know it is very important to open an RRSP as soon as possible.
I think many young people are trying to pay off their student debt first. But I think they need to know they can do both at the same time. Start off small, and grow bigger as you make more money and pay off your debt.
December 16, 2011 at 11:51 am
My employer matches contributions up to 5%, so through work I contribute 10% – $10,000 annually. But I have a lot of contribution room left, so still trying to max that out. We contribute another $500/month to TFSA, $250/month to RESP, and $500/month to husband’s RRSP. At that, our savings is 20%, with debt repayment @ 20%.
Had a bankruptcy back in 2001, so trying to catch up from that — we’re very fortunate now, and we recognize that.
December 16, 2011 at 11:56 am
One thing I’m a little disappointed are these fabulous returns Gail posts vs my actual gains. I think with my RRSP since 2006 (graduated Uni) I’ve only ever broken even with my investments. I’m not in a high risk group investments either. Are those years just a poor time to be in the market, or should I be making some changes to my type of RRSP? For a few years, it was at 6% returns, but now over the past 5 years I think it’s barely broken even.
December 16, 2011 at 12:11 pm
Here’s a link to an informative discussion about RRSP vs. TFSA contributions:
http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/the-wealthy-barber-explains-tfsa-or-rrsp/article2197460/
December 16, 2011 at 2:02 pm
I would love to get 5% a year but it seems that ever since the stock market tanked (I have been contributing small amounts for a loooooong time) and I still haven’t gotten back to my initial investment. Not sure these are worth it.
December 16, 2011 at 3:32 pm
If you are young, at the beginning of your RRSP savings age (20s, 30s, 40s) then you should be AGGRESSIVE in your portfolio. The 5% that Gail talks about is the average over 30 or 40 years of saving. As you get older, you slowly move more and more into SAFER investments so you are not affected by the ups and downs so much. The last thing you want is to have 100% exposure with 10 years to go til retirement and the market crashes.
I heard that a good rule is to have your age in percentage of safe investments, so you are 35, then have 35% in bonds and GICs and 65% in Stocks and other high risk items (equities, etc.).
Fear of the Stock Market can be a huge reason why you may end up with too little in earnings. The key for me was to not look at my investments at all. I check them ONCE a year and re-divide them so the % are correct in each category and then I forget about them. Also, I hold them with different banks (some with TD, some with ING, some with London Life) and each place has different exposures and risks. While my TD RRSPs were getting beaten to a pulp (6%-10% loss per year – but back to full book value now) I was getting almost 20% returns on my London Life account (100% Canadian Equities).
Diversification is key. I also save for my EF and own multiple properties. If the real estate market tanks, my stocks will most likely go up, if stocks tank, then real estate seems to climb. A small vault with some physical gold protects against all h*ck breaking loose.
My salary is very average for Ontario. I just live way below my means (I had $20,000 saved for a replacement car and bought a $7,000 car instead) and have a family which has helped me out a lot (downpayment, babysitting (no daycare), so I am very blessed.
December 16, 2011 at 4:53 pm
I am blessed this year with tons of overtime and a bonus. Also when I work away from the office I get a per diem that is almost like free money as I can live cheaply when in the field. This year I am planning on $32,000 in my RRSPs which uses up my 2010 room and about half of the rollover money I had.
I likely won’t have another year like this (or not sure my sanity will survive another year like this) so I am going to make the most of it. I should have a massive tax return this year which is all going on my mortgage.
Being in Vancouver my mortgage is still big…and I am only 3 years in to the repayment so I have a long way to go on that. Hopefully this year will take a big bite out of the principle.
December 16, 2011 at 8:50 pm
Thanks very much K!! I am also with the fed gov’t so top up is generous, but that means a high likelihood of having to pay a lot back in taxes. You provided some good tips and I will sock away as much as I can! Thanks again!
December 17, 2011 at 12:03 am
I started contributing to an RSP in my early 20’s and have been making max contributions until 35.
I haven’t put money in it for a couple of years.
I found a good plan is to put all employment bonuses directly into the group rsp to avoid the obscene tax rate on bonuses.
My focus now is paying down the HELOC and mortgage.
RESP and TFSA accounts see my investment dollars every year.
I told my younger siblings, while you live at home SAVE UP! SAVE UP! SAVE UP! because the days may come when you may want to move out and buy a house/condo, a car, get married and have kids. These days it isn’t getter any cheaper!
December 17, 2011 at 4:25 pm
I have hit my contribution room (as of last year) so now I contribute whatever my income will allow (less the pension adjustment). I have been working for over 20 years so my limit was large, it is a great success for me to be hitting the max.
As my contribution limit is reduced from previous years without the carry over I will have to maximize my TFSA (and my spouse’s TFSA). I’m worried about the tax implications because these larger RSP contributions have resulted in a refund or zero owing which I don’t think I will continue to have.
Still, having an RSP balance that is larger than what my parents had at retirement combined makes me feel very content.
December 17, 2011 at 11:42 pm
Actually my financial advisor told me it made more sense for me to contribute to a TFSA than an RRSP. When I retire, due to my Pension Plan, I will still be in a higher tax bracket. I contribute a lot to my pension through work. Some others may be in this boat as well.
December 19, 2011 at 7:58 am
@Momma: I called EI and told them to start taking taxes off my benefits because I didn’t want to get hit with a huge tax bill. Dropped my bi-weekly payment down to $628 but it was worth it to me not to have to worry about it.
I put $50.00 into an RRSP bi-weekly for a total of $1,300 per year. My husband puts in $150.00 monthly so $1,800 per year. We also put away $125.00 each for our two girls and $25.00 for my niece monthly into RESP’s. We plan to increase our RRSP amounts once our CC debt is paid off.
December 19, 2011 at 4:26 pm
Almost 40 now… been saving steady bt small amounts since my early 20’s. BUT since I know nothing about the “game” I have invested in diversified packaged funds and they have been doing so poorly that I feel defeated every time a statement comes in. It’s NOT been 5%/year over the time I have been putting in, not for a long time now. That scares me, but I keep investing that $250/month even when it hurts and praying the whole dollar cost averaging thing works out by the time we are ready to retire (no pensions in our jobs either).
December 20, 2011 at 2:39 am
I plan to contribute whatever CRA tells me I can put into my RRSP. I’ve been maxing it out for the past few years and it’s my intention to continue to do so for as long as I can.
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