Pay yourself first, because you can’t buy more time.

 

As the deadline to make 2019 Retirement Savings Plan (RSP) contributions is rapidly approaching, there is no better time to put into context the importance of paying yourself first and the benefits of delayed gratification.

 

That isn’t usually how an advisor starts talking about the benefits to the RSP. But as the seventh highest taxed population in the world, maximizing the few advantages Canadian tax payers have access to become paramount.

 

Pay yourself first, either by programming periodic payments to the RSP over the course of a calendar year, having the contribution done at source or (if offered), through an employer matching plan. The effect of making these contributions over the course of 12 months according to the amount allowable on your Canadian Revenue Agency Notice of Assessment from the preceding year accomplishes three very important goals:

 

1. It lessens the ‘bite’ of making a lump sum contribution at the end of the contribution period.

2. If the deductions can come off at source or automated on a bi-monthly or monthly basis when the calendar year ends, you are saving for retirement without even thinking about it.

3. The payments (to yourself) are being invested periodically according to your agreed upon investment policy statement into your retirement portfolio. This takes out the ‘market timing’ element and empirical evidence has shown that this is the most effective way to generate a long-term return.

 

And then there are the benefits of delayed gratification. Consider for a moment the effect of your money compounding over time, tax free. Doubling your money at annual growth rate of 10% doesn’t take 10 years, it takes approximately 7. Not having to pay taxes on your capital gains, dividend income, or interest income means that your total return is fully available for re-investment. It is easy to see that in your peak earning years, (which are also likely your peak spending years), saving for your retirement by maximizing your RSP can be amplified when a rate of return is applied, but the most important element in the equation is time. Which is why it is never too early to embark on the process.