With real estate prices soaring, cost of child care on the rise as well as grocery bills, gas, clothing, all costing more than just 10 years ago, it is becoming increasingly difficult to save more. One thing that hasn’t changed is the necessity to save as much as we can so that we can live a comfortable retirement. But how can we save more if we’re already stretched so thin?
A good way to think about it is in terms of “what income do I have right now that I can devote to savings?” If we calculate that number based on our income minus taxes and expenses as well as CPP and EI deductions, we come up with a certain dollar amount. This number will, of course, be different for everyone. However, that number will change, in fact increase, once the maximum amount of CPP and EI premiums for the year are reached.
Once we no longer are required to contribute to these programs for the year, we have more disposable income. We can either spend this money, or contribute to our retirement savings plan. Since it would have little to no impact on our lifestyle if spent, why not contribute to a retirement savings plan? This contribution will compound right up until the day we retire! The added bonus is that we will receive a tax deduction for those contributions at the end of the year. And, let’s face it, we would all like to pay less taxes wouldn’t we?
So What Does This RRSP Strategy Look Like?
Let’s say you earn $75,000/year in income and get paid twice per month (on the 15th and 30th of every month).
- Your CPP contribution is $155 per pay and your EI contribution is $52 per pay
- These contributions will be maxed out by your 17th pay or around August 22nd if counting from the beginning of the year
- This means you will have $207 per pay in more disposable income that was unavailable to you up to this date (less than that on an after tax basis)
- If you contribute this amount to your RRSP for the remainder of the year, you will have contributed an extra $1,500 for the year and received a tax deduction as well.
Over a 30 year career (assuming my salary doesn’t increase), this equates to an extra $45,000 in retirement savings that I otherwise wouldn’t have had! Using money that I never would have missed!
Everyone’s financial situation is different so we’ve included a calculator below. You can plug in your individual salary and pay periods to determine when you will be eligible to implement this strategy.