The day you receive your first pay cheque is always a momentous one. There’s so much you want to do with that money. If you’re like most people, you likely spent your first pay cheque on food, clothes or entertainment. Not many people put aside cash from their first cheque towards a retirement fund. However, when you get your last pay cheque, you’ll likely wish you saved more. It is never too early to start saving money in an RRSP (registered retirement savings plan).
There is no firm rule on how much you should contribute towards your RRSP. However, since RRSP’s were designed so that the contributed amounts would be tax-deductible, there is a maximum contribution limit. The main objective of setting up this account is to save enough money to have a comfortable retired life without having to compromise on your lifestyle.
The amount you need to contribute depends largely on how luxurious you would like your retired life to be. To calculate a rough idea of how much you need, check out an RRSP contribution calculator. This tool uses many factors such as your current age, RRSP contributions to date and assumed rate of interest to calculate the sum you will receive at your desired retirement age. The amount you contribute each year will vary based on your income and lifestyle. For example, if you have young children, taking care of them will be your top financial priority. However, in your fifties, when your children are more independent, you will likely have more money available to contribute a higher amount to your RRSP. If all goes well, your income will also increase substantially over the years. That means when you have more money you can also take advantage of unused contributions that carry over from year to year. Unused contributions refers to the difference between the maximum contribution amount and the amount you have contributed towards your RRSP. At the end of each financial year, the government calculates this amount and allows you to carry it over to the next year. Thus, even though your income may not have increased drastically, you can put aside more money. You can also over contribute up to $2000 towards your RRSP. If you cross this limit, you will be charged a 1% penalty fee each month on any excess contributions.
So, plan your finances wisely. If you do this today, your future self will be eternally grateful.
This post contains sponsored links from Sun Life Financial.