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Retirement savings

January 20, 2015

Give your RRSP contributions a raise

As your income goes up, so should your RRSP contributions - a small increase can make a huge difference.

If you’re a younger worker with a large mortgage and small children, it may be a stretch to contribute even $100 a month to your registered retirement savings plan (RRSP). But as your income goes up, increasing your monthly contributions each year by only a small amount can make a huge difference.

For example, let’s assume that you start an RRSP at age 35 and plan to retire at age 65. Initially, you contribute $100 a month ($1,200 a year) at an assumed 4% growth rate.

According to the Sun Life RRSP contributions and withdrawal calculator, if you continue to save at this rate, after 30 years you would have $69,994 in your plan. However, if you increase your monthly RRSP contributions by $50 each year, by age 64 you would be contributing $1,550 a month ($18,600 a year). As a result, you would accumulate $476,924 in your RRSP account by your planned retirement date — nearly seven times as much!

Take advantage of matching contributions

If you belong to a group RRSP at work and your employer offers matching contributions up to a percentage of your salary, another reason to increase your annual contributions is to ensure you take full advantage of this top-up. Otherwise, you are “leaving money on the table” that could eventually be in your pocket.

Boost your savings when you get a raise

Because workplace group RRSP contributions are typically a percentage of salary, as your salary goes up, your annual dollar contributions will also increase. But you can boost your savings even more by giving yourself an RRSP contribution raise when you get an annual pay raise.

If you allocate the first 1% of your salary increase towards your retirement savings, you won’t even feel it. That’s because instead of your pay cheque going down, it just won’t increase by as much. The impact of upping your RRSP contributions when you get a raise will be compounded if your raise or promotion entitles you to a higher employer match percentage. Furthermore, you will also get a bigger income tax break because RRSP contributions are not taxed.

Sign up for an automatic increase

Your group RRSP or defined-contribution pension plan may allow you to sign up for an annual “auto-escalation” of your contributions, so they are increased automatically. Otherwise, you will have to specifically request that your contributions be increased each year.

You can also enhance your RRSP savings by diverting money to your individual or group RRSP from your tax returns, bonuses and windfalls such as inheritances.

By giving your RRSP contributions regular raises, you will be able to save more money faster, to help ensure you have the funds you’ll need for a happy and healthy retirement.

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