Calculate your way to retirement
Statistics show most investors are slow to top up their RRSPs. The result is the usual crunch to beat this year’s March 1 deadline, culminating in a last-minute flood of contributions. Although for most this is simple procrastination, a lot of it has to do with innumeracy.
Most of us, you see, aren't very good at math. And, when it comes to RRSPs, there are certainly a lot of numbers floating around – many of which are designed to scare you. Here's a guide to what you need to know and some tools to help with the numbers.
Although the prime benefit of an RRSP is its long-term growth potential, most people are attracted by the immediate tax relief available, which varies from person to person.
Not sure precisely what's at stake in terms of taxes? Well, it all depends on your marginal tax rate, which is the rate of tax applied to the last dollar added to your taxable income. The highest rate in Ontario, for instance, is 49.5 per cent, whereas it's only 39 per cent in Alberta.
You may not be at the top of the scale, however, which varies from province to province. Looking at marginal rates, this handy calculator quickly illustrates how much of the government's money you can put to use today depending on what you make.
The general rule: The higher your taxable income, the greater the value of investing in an RRSP.
Despite all this, RRSPs are really not about saving tax. They're a means to an end – a long and successful retirement, with the emphasis on long. You see, if you're lucky, you're probably going to be retired for quite a bit longer than you've imagined.
In the past 50 years, life expectancy has increased by at least 16 per cent. Add in the fact that we enter the workforce much later now and it’s clear that some Canadians can expect to be retired for nearly as long as they were in the workforce. And that longevity is going to stretch a lot of retirement plans.
According to recent Statistics Canada data, the median life expectancy at birth for Canadian men is approximately 79 years; for women, it's closer to 84.
Life expectancy is based on averages though, so you may want to consider other factors in your analysis – including family history, as well as your personal health and fitness habits. Try this tool to get a glimpse of the future.
Once you've decided that an RRSP really is the right move for you, the trick is to get going as quickly as you can.