How much you save is important, but when you start can also have a big effect. The sooner you invest – even if it’s only a small amount – the more time your money has to reap the benefits of compounding. Put simply, not only will the money you originally saved have the opportunity to earn returns, those returns can also, potentially, earn returns.
And lest you be discouraged, remember that no matter what age you are, “starting now” will always be earlier than "starting later."
Example:
Starting at age 30, Cathy made annual RRSP contributions of $6,000. At 45, however, she found that between a mortgage and the cost of raising two kids and saving for their education, she couldn’t afford to contribute. Nevertheless, when she retires at 60, she will have a very attractive nest egg.
Jay doesn’t begin contributing to his RRSP until age 45, but then contributes $12,000 per year until he’s 60.
| Cathy | Jay | |
|---|---|---|
| Years contributed | 15 | 15 |
| Years invested | 30 | 15 |
| Total amount invested | $90,000 | $180,000 |
| Value at retirement | $334,693 | $279,312 |
| Total growth | $244,693 | $99,312 |
Hypothetical illustration only. Both investment scenarios assume an annual return of 6%.
Cathy
Began contributing at age 30 and stopped at 45.
Jay
Began contributing at age 45.
In the end, Cathy’s portfolio is worth almost 60% more than Jay’s, even though Jay invested twice as much. That’s because Cathy’s contributions had so much longer to compound; her RRSP earned returns not only on her original contributions, but on the returns from those contributions.
Talk to your advisor about setting up a regular savings plan.
For definitions of technical terms in this piece, please visit iaclarington.com/glossary and speak with your investment advisor.
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