Saving for retirement

From Financial Consumer Agency of Canada

Starting to save early means you have to save less

It's never too early to start saving for retirement. This may make saving and planning for retirement easier than starting to save later in your career.

Saving early means:

  • you have to save less each month
  • your money will have more time to earn a larger amount of compound interest

Example: How much you need to save each month if you start to save for retirement early

Suppose you plan to retire in 20 years. You want to save $75,000 for your retirement. You're earning an annual interest rate of 5% compounded on your savings.

Compare how much you would have to save each month if you start to save now or in 10 years. When you have 20 years to save instead of 10 years, you have to put $14,160 less into the bank to reach your goal. This is because you earn more money in interest the longer you save. In this example, you earn $14,020 more in interest when you have 20 years to save than when you have 10 years to save.

Table 1: Compare how much you would have to save each month if you start to save now or 10 years
Years you have to save How much you need to save per month Amount saved Amount of interest earned
With 20 years to save $181 $74,400 $30,960
With 10 years to save $480 $74,540 $16,940

The following graph shows how you have to save less each month if you start to save early.

Figure 1: How starting to save early means you have to save less each month

Figure 1: How starting to save early means you have to save less each month
Figure 1 - Text version
Years of saving $181/month $480/month
1 $2,222.47 0
2 $4,558.45 0
3 $7,014.35 0
4 $$9,595.69 0
5 $12,309.10 0
6 $15,161.33 0
7 $18,159.49 0
8 $21,311.03 0
9 $24,623.82 0
10 $28,106.09 0
11 $31,766.53 $5,893.85
12 $35,614.24 $12,089.24
13 $39,658.80 $18,601.60
14 $43,910.29 $25,447.14
15 $48,379.30 $32,642.92
16 $53,076.95 $40,206.84
17 $58,014.94 $48,157.75
18 $63,205.57 $56,515.45
19 $68,661.76 $65,300.73
20 $74,397.09 $74,535.49

Note: the numbers are calculated using the Ontario Securities Commission’s Compound Interest Calculator.

Consider how inflation will affect your savings

Inflation is the rising cost of consumer goods and services. It's measured by the Consumer Price Index (CPI). The CPI measures changes in the price of about 600 consumer goods and services over time.

You can look at the impact of inflation in two ways:

  • it will increase the cost of goods and services you buy
  • it will reduce the buying power of your savings over time

For example, a $100 purchase in the year 2006 costs approximately $118 is 2016.

Example: How inflation affects your retirement savings

Suppose you plan to retire in 20 years. You want to save what $50,000 buys today.

Based on an inflation rate of 2% per year, it will take $74,300 in 20 years to buy what costs $50,000 today.

How to start saving for retirement

Start a habit of saving a portion of your pay from every paycheque if you can afford it. The earlier you start saving, the longer your money can earn interest and grow.

To reach your savings goals, learn about

Using automatic payments and deposits can be a good way to save money. Contact your financial institution to have a set amount of your pay automatically deposited into a savings account. Consider increasing the amount of the automatic payments or deposits as your pay increases.

Balancing your current financial priorities

Saving for retirement can be difficult when you have other demands on your money, like a mortgage or rent, car payments or student loans. Make a budget so you can better figure out how much money you can afford to save for retirement.

Use the Budget Calculator to help you determine where your money will go when you are retired.

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