Q. My husband and I are in our early 20's and would like to know what percentage of our income should we be setting aside in RRSPs and investments each year so we can retire comfortably?
A. Your question couldn’t come at a better time for your stage in life. The earlier you start, the better, thanks to the power of compound interest and long term market exposure.
The maximum RRSP contribution for the 2009 tax year is 18% of your 2008 income up to $21,000. However, there’s no quick and easy answer as to how much you should contribute. That’s because everyone’s situation and goals are different. For example, we can all have very different concepts of what “comfortable retirement” means. Are you envisioning a retirement filled with world travel, and an exclusive cottage home on a Gulf island? Are you hoping to take an early retirement, and turn your hobby into a small business? Or do you see yourself enjoying a simple life, where you devote your time and talent to a local charity?
Thus, it isn’t a percentage figure that you need to determine, but rather a strategy. A wise first step is to speak to a financial advisor. Your strategy plan will involve many variables such as your time horizon, risk tolerance, and your individual needs and wants over your lifetime up to and including retirement. The best plan lets you look forward to retirement, while enjoying life today.
At your age, you also have the wonderful opportunity to adopt certain approaches that will increase your financial success later in life. A great example is to start now to set up regular monthly deposits to your RRSP, rather than making sporadic or annual contributions. For starters, it’s generally easier to make monthly payments to maximize your contribution room, rather than having to come up with the cash all at once come the spring deadline. Secondly, if you are investing in the market, you will be using a strategy called “Dollar Cost Averaging”, which assumes you will reduce your risk because you are buying into the market in steady amounts, over time.
You should also consider a Tax Free Savings Account. It lets you save more, above and beyond your RRSP limit. A TFSA is one more thing to discuss with your financial advisor.
Whatever your ultimate goals may be, you have one big advantage going for you – time! Simply by asking the types of questions like your winning question, you could end up with many thousands of dollars to your advantage as you get older.
One final point to keep in mind: Times will continue to change. For example, by the time you reach age 65, average life expectancy might have climbed to 90. Whatever the case, you’ll be ready for it!
P.S. Click here to see the difference compounding interest makes if you start saving early for retirement. There is also some neat calculators for illustration purposes as well.
