When Should I Start Saving for Retirement?
Saving for retirement can feel overwhelming, especially in your 20s and 30s. So, when should you start saving for retirement? The short answer: as soon as possible! Here’s why.
Capitalize on the power of starting early
The earlier you start saving, the more your money can grow. Here’s how it works: If you start saving $100 a month with an average annual return of 6% at age 25, you could end up with over $185,000 by age 65. However, if you wait until age 35 to start saving, you'd only have about $94,000 at retirement. By starting to save 10 years earlier, you could end up with an extra $91,000 in savings!
Starting early gives you a big advantage thanks to compound interest. This refers to earning interest on the money you’ve saved and on interest earned along the way.
Use investment accounts to build your nest egg
In Canada, there are two different types of investment accounts to help you save for your retirement.
A registered retirement savings plan (RRSP): An RRSP allows you to save money for retirement on a tax-deferred basis. This means the money you contribute is deducted from your taxable income, so you’ll pay less tax now. However, you’ll pay taxes when you make withdrawals in your retirement.
A tax-free savings account (TFSA): A TFSA lets you grow your savings tax-free, which can make it an effective option for long-term retirement savings. Any money you withdraw from a TFSA is not taxed, giving you flexibility and potential for growth. However, there is an annual dollar limit for TFSA contributions.
The earlier you start contributing to these accounts, the longer your savings can grow, and the more you’ll benefit from the tax advantages with each option.
Saving for your retirement may not be your top priority. Taking advantage of compound interest and contributing to a TFSA and/or RRSP can help build your future nest egg. Plus, if you’re a member of a workplace pension plan, you’re already contributing to your retirement savings, which is a huge advantage.