Inflation is high, and so are interest rates. As a result, budgets are tight and savings are limited. Is it worth saving in a registered retirement savings plan (RRSP) even if you have little money to put aside this year? Overview with Antoine Chaume Legault, financial planner at Assante Capital Management, Major Team.
Let’s start at the beginning. Do RRSP rules provide for a minimum for deposits? Can any amount be placed there?
You can really put any amount into an RRSP. The more you can save, the better, naturally. But there is no minimum.
That said, in your opinion, is it worth saving in an RRSP if you have only managed to put aside small amounts this year?
Small financial decisions have a big long-term impact. This is what I call the billiards effect: when you aim at a ball that is very close, the angle of impact is less important. But when you have to hit a ball at the other end of the table, even a very slight difference in the direction of the impulse will send the ball to two completely different places. It’s similar with money. Very small amounts saved in a disciplined manner over time can add up to considerable amounts in the end, even if in the short term you don’t realize the impact of your decisions.
Do you have a numerical example?
Yes of course. Let’s go with a simple example. Consider a 35-year-old who is able to save only $25 per month until he retires at age 65. That’s a savings period of 30 years. If we assume a return of 6%, this means that the person will have accumulated $24,481.41 in their RRSP at retirement. Since the money is tax-sheltered, the amount is higher than if it had been placed in a non-registered account: at that time, the amount would only be $16,381.52.
We agree, $25 a month isn’t a lot of money for most people. And yet, the amount obtained in the end is significant. It’s one trip per year for several years. It makes a difference in terms of quality of life in retirement. Young people have the privilege of time, so they benefit from the magic of compound interest.
What would be your advice for those whose budget is tight due to high debt?
Of course, you always have to make sure you don’t work in a counterproductive way. Yes, generally speaking, it’s a good thing to put money aside. On the other hand, if we put $5,000 in an RRSP, or even just $1,000, while we have very high-rate debts, such as credit card debts at 25% or even car loans – I I’ve seen 12% – it’s certain that we’re not getting rich. In cases like these, I would instead suggest paying off debts first, and then implementing a systematic savings strategy in your RRSP.