After what seems like the shortest and longest year ever, we somehow seem to be approaching that time again: RRSP season. Thanks to the tumult of 2020, you may find yourself in a different financial position this year than those previous. Some folks’ savings may be considerably smaller because of inconsistent employment earnings. Others may have bolstered their savings thanks to CERB and/or the various restrictions in place due to COVID (oh, how we miss you travel).
With lots of time between now and March 1, some mindful planning this holiday season can go a long way to help mitigate competing financial priorities as we get closer to the contribution deadline. 2020 has not been kind but there are still opportunities to make the most of our yearly RRSP contributions, no matter the amount.
One of the best ways to maximize the impact our RRSP contributions will have on our retirement nest egg is to contribute 50% more every year. Yes, it sounds obvious but there is actually some not-so-obvious strategy involved here.
Let’s look at the difference between contributing $10,000 and contributing 50% more, or $15,000 at a marginal tax rate of 40%. Contributing $10,000 means you would receive a $4,000 tax return. Sounds great but consider this: you take out a $5,000 loan or use a line of credit in order to contribute an additional 50% for a total contribution of $15,000. Instead of getting a $4,000 return, you would receive $6,000.
The linchpin of this strategy is to then turn around and use your return to pay back the $5,000 before deciding how to utilize the remaining $1,000. In an ideal situation, you would invest the remaining amount in a TFSA and/or put it towards next year’s contribution.
So, what is the ultimate impact of borrowing to maximize your yearly RRSP contributions? If you were to start saving at 35 by contributing $6,000 per year until the age of 65, you would end up with $424,564 (with a yearly accruing 5% compound interest rate). If instead, you took out a loan or used a line of credit to increase your yearly contribution by 50% (for a total of $9,000), at 65 you would have $636,847 saved. We can all agree, a $212,823 difference is nothing to sneeze at.
Although it is never too late to begin saving for retirement, this example demonstrates how maximizing our RRSP contributions and being strategic with our returns can make a world of difference when it comes time to retire. It also shows how the longer compound interest has to work, the greater the impact on contributions.
Under ‘normal’ circumstances, people can sometimes find it tempting to spend yearly tax returns on fun things like vacations or big-ticket items. This year though, the ‘temptation’ to spend may not be so much about fun as it is about making ends meet. We all know 2020 has been anything but ‘normal’ so at the end of the day, it’s important to remind ourselves to simply do our best, whatever that looks like.
For help determining what the right RRSP contribution amount for you is, connect with us.