Putting it off can pay

So you’ve been procrastinating on your retirement plan and now you’re worried. Don’t despair, there is hope and time. Here’s what you can do to make retirement work.

Albert Einstein is believed to have said that compound interest is the eighth wonder of the world. You may have heard a similar sentiment coming from investment advisers with respect to your retirement planning. One of the main reasons for that is they want you handing money over to them ASAP, because the more money they have under administration, the more money they make.

I just Googled “the magic of compound interest” and 2.7 million hits came up — the majority from investment firms. Here’s a typical one: Susan invests $5,000 annually in her RRSP between the ages of 25 and 35, for a total investment of $50,000. Bill invests $5,000 annually in his RRSP between the ages of 35 and 65. In total he invests $150,000. At the end of the year both Susan and Bill turn 65. Assuming a 7% annual return, Susan’s portfolio builds to a value of $602,070 and Bill’s increases to $540,741. So starting early leaves Susan ahead by $61,329. The conclusion? Start early to save for retirement.

While starting to save for retirement as early as possible is a worthy goal, there are circumstances that make it difficult to follow Susan’s strategy.

For one, to make compounding magical you need a high rate of return, which can be difficult to achieve given the current environment of low interest rates and a rocky stock market. For example, if Susan and Bill only made a 4% annual return after fees, their portfolios would end up at $210,591 and $303,307 respectively. Bill, the one who started later, now ends up $92,716 ahead.

Another hurdle to early savings is coming up with disposable money. Where does the average 25- to 35-year-old find $5,000 a year to invest? Many people at this stage of their lives are still burdened with student loans. Are we really going to recommend that they start saving for retirement before they finish paying for their education?

Even if we assume they worked during the summers or part time during the school year and their parents helped out so that they graduated debt free, young people may have other financial commitments. According to the Canadian Bankers Association, 60% of Canadians pay their credit card balance in full each month (Abacus Data, December 2014). If so, that leaves 40% of us carrying a balance month to month and therefore incurring high interest charges.

That means four out of 10 Canadians should not even think about saving for retirement. They should be focused on paying off their credit cards. That’s because with credit cards, compounding works against you — interest usually compounds on a daily basis. Revolving credit card debt is a great investment for the credit card issuer, but it’s a retirement dream destroyer for the holder.

But let’s assume there is no credit card debt. The next obstacle is that in order to start saving in an RRSP you need contribution room. How much room has the average person built up by age 25? Many young people haven’t worked for long and some haven’t found full-time employment right after university or college. This means many younger people won’t have much RRSP room to start saving for retirement.

And even if there is RRSP room, many people in their 20s are in lower income brackets, so they wouldn’t be getting much of an RRSP refund.

For example, the marginal tax rate in Ontario in 2015 for incomes between $18,894 and $40,922 is 20.05%. A $5,000 RRSP contribution gives a tax refund of $1,003. At a higher salary of between $89,402 and $138,586, the marginal tax rate is 43.41%, meaning that same contribution would give a refund of $2,171, more than double the amount.

But let’s say the 20-somethings have parents who helped them graduate debt free, they live within their means and have no credit card or other ugly consumer debt, they have RRSP room and are making a good income — at least $50,000 — does it then make sense for them to start saving for retirement?

Well yes, unless they are going to need money for other things such as buying a house, getting married or having kids.

And that’s the big problem — they need a place to live and start a family, which costs a lot of money. Where is it going to come from if all their disposable income is sitting in a retirement savings plan?


These are a few of the reasons why many Canadians procrastinate when it comes to saving for retirement. It’s not because we are fiscally irresponsible; it’s simply because it’s expensive to live and raise a family.

If you are in this situation you may be worried about how you are going to make your retirement work. Some people simply give up. No one should — there is hope.

In fact, there is an incredible amount you can do in 10 years, or even less, to secure your retirement. What you do during this key period is going to be absolutely vital to how well your retirement is going to go.

If, like many of us, you’ve put off saving for retirement, here are the steps I would recommend.


This has to be the most important step when it comes to retirement planning, yet hardly anyone does it. That’s because we don’t have to. No government agency forces us to track our personal spending for taxes or any other reason.

But expense tracking is vital because we each have a personal financial situation as individual as our fingerprints. We’re all different and that’s why simple rules of thumb such as needing 70% of your pre-retirement income to maintain your standard of living in retirement don’t work. We need to know the details of our spending.

As an accountant you could track your spending easily by downloading your personal banking information and using a spreadsheet. That’s how I used to do it, until I discovered websites that allow you to do it automatically for free. One such site is www.mint.com from Intuit Inc., makers of QuickBooks software. It’s a free service whereby you create an account and link it to your personal bank accounts and credit cards. It then automatically downloads your transactions and sorts them by category and displays the results in colourful charts, allowing you to analyze your spending categories from highest to lowest and even export the details to a spreadsheet for further analysis.

Project your future spending

Once you know what you are spending now, you can then project what you are likely to spend in the future. This could be encouraging news. First, think about expenses that will automatically decline, or even disappear, the day you retire. I can think of a few — income taxes, CPP and EI premiums, RRSP and pension contributions, income protection insurance and possibly business clothing, dry cleaning and lunches, etc.

But some of your largest expenses won’t necessarily be reduced. In fact there are many expenses that have their own timeline. Your retirement date has nothing to do with whether they decline or disappear. This includes some of the highest expenses you’re likely to have, such as home mortgage, repairs and maintenance; property taxes, insurance and utilities; car loan or lease costs and insurance; children’s education; and vacations.

Some costs, such as medical and dental, will most likely increase after you retire. You have to factor these in because you can’t avoid them.


Expenses that have their own timeline are the key to planning for your retirement. The best thing you can do is consider the timing of such expenses. What year will your mortgage be paid off? If you buy your car, when will the loan be paid off? If you have children, when will they graduate from university?

In many cases, people are on track to carry some of these expenses into retirement. Obviously this will lead to cash flow problems as they try to pay all the bills on a reduced fixed income. There is even a disturbing trend of people upsizing their homes in their 50s even after the kids have moved out. That is the opposite of what people planning for retirement should be doing.

The key is to reduce or eliminate these expenses before retirement, not to extend them into retirement.

You have a good deal of control over some of these expenses. You could decide to accelerate your mortgage payments and retire the mortgage before you do. You could time the loan on your car so it is paid off while you’re still working.

But in some cases you don’t have much control. If you are helping to pay for your children’s education, it depends on when they were born, which is pretty hard to change at this point!


If you have been a procrastinator, the key to building your retirement nest egg is to eliminate or reduce as many of these expenses as soon as you can and then allocate every penny that used to go to them into your RRSP.

Let’s say you are 55 and have 10 years to go until you retire. Your yearly mortgage payments of $24,000 will be paid off in five years and your annual car loan of $6,000 will be paid off in four years. Assume you have two children and all your RESP savings were used up getting the first one through university. You are paying $12,000 a year to help your youngest child graduate from university, which will be in four years.

During year five you’ll be able to invest the $18,000 that was previously going to the university and your car dealer. With the elimination of your mortgage, during each of years six through 10 you’ll have a total of $42,000 available to save instead of spend. Over the next six years you’ll have a total of $228,000 to invest in your RRSP.


The key factor now is tax. During this period, you’ll probably be in your highest tax bracket ever and you’ll have a lot of RRSP room available because of all the years you worked but couldn’t afford to make RRSP contributions.

Each and every year from now on, the tax refund must be reinvested in your RRSP.

If we assume all the RRSP contributions yield a tax refund averaging 30% and you reinvest all RRSP refunds in your RRSP at a 4% annual rate of return, the $228,000 invested over the six years would grow to a value of $339,253. That is a significant amount and it was accumulated in only six years.

Reducing your expenses, investing the savings in your RRSP and reinvesting all RRSP tax refunds could make a big difference.

But many people won’t do this. They’ll sail through the 10 years before retirement spending everything they make, or more. These people will then spend each and every day of their retirement years worried about running out of money.

Why risk a retirement like that when the procrastinator’s plan is so simple and easy to follow?


There is a rule of thumb that says you’ll need 70% of your pre-retirement income to maintain your standard of living after retirement. Unfortunately it’s not as simple as that because we each have a personal financial situation as individual as our fingerprints. So 70% may be the right answer for some people but the totally wrong answer for everyone else. Basing your planning on a rule like this could lead to major problems during retirement.

A far better solution is to base your calculations on your spending, not your income. After all, your spending is what you need to maintain after you retire, not some arbitrary percentage of your income.

Here’s a suggested way to figure out roughly how much you’ll need to save for retirement.

1. Track your current annual spending to see how much you spend and where your money is going.
2. Project your annual spending after you retire by reducing expenses that will decline or disappear and bumping up ones that will increase.
3. Estimate the annual pre-tax income required to cover your annual spending.
4. Estimate how much you will receive from guaranteed sources such as pensions, CPP and OAS.
5. The difference between No. 3 and No. 4 is the annual amount you will have to fund from savings in your RRSP, TFSA and investment accounts.

Now the hard part: estimate how many years of retirement you will have and calculate the net present value of the annual amounts you will have to fund using the discount rate of return you expect on your RRSP during retirement, including a factor for inflation.