Tag Archives: compound interest

When You’re In Charge of Your Own Retirement Finances

We talk about finances all the time, and one of the biggest financial decisions is probably your retirement savings. That’s more critical when you’re older but way easier to accomplish when you’re younger. Now, this is not a shot against the current government, but a comment about government programs overall.

There are a few things the government does really well. Included in that list is the military, foreign affairs and the passport office which is just incredibly efficient and well-run. But generally, any government programs are not very effective, and you will always be able to do better, and do more on your own, without waiting or hoping the government will come to your rescue. They won’t – and by the time you’re done waiting for a bailout package, or meaningful help from the government – you’ll be dead, honestly.

There is no place where that is clearer than with our Canada Pension Plan: The CPP pays a maximum of $884 to you in retirement. Let’s use this $884 maximum, even though the average pension benefit recipient gets $481.

Let’s take the lowest working person in the country. We’ll take someone who works from age 18 to age 65 and makes $2,000 a month. So this is a person who never gets a promotion, never gets a raise, and never improves on that income – someone who literally makes a small $2,000 a month throughout their entire working life.

Until retirement, every month, this person has $42.28 deducted from their pay towards CPP. The employer portion is the same, because employers match the deduction. So, for this person, every pay period, $84.56 goes towards their CPP in order to get a maximum of $884 each month after retirement. Simple math so far?

Now, if this person took that same $84 a month and invested it, at a 10% return over their lifetime, they would have $1,084,000! That translates to a monthly pension of $9,033! Let me say that again: Taking the same CPP deduction of someone who makes $2,000 a month for life, and investing it on their own, would have a pension of over $9,000 a month, AND he or she would leave an inheritance of over $1 million to their family.

THAT is why I want you to pay yourself first every month, and have some savings deducted right off your pay where you won’t miss it. What would you rather have? The $884 CPP, or your own $9,000 each month?

Want to Be a Teenage Millionaire?

Do you want to make a deal with your parents or with yourself? You can spend every dollar you’ll ever make the rest of your life, because at age 20 you’ll already be set to be a millionaire. The only thing you need to do is save $9,300 by your 20th birthday. Nothing more – nothing less. After that, without getting into debt or touching these savings, you can spend every dollar you earn – if you choose to. And, if you also save a bit of each paycheque, it won’t be hard to reach two million dollars.

It’s the magic of compound interest and works with something called the Rule of 72. Simply take the rate of return on your investments and divide it by 72. That’s how long it will take for your savings to double. So, a 10% return doubles your money every seven years.

Saving that $9,300, investing it, and forgetting about it, at a 10% rate of return will double your money very quickly and very frequently:

Invested by age 20:                           $   9,300

At age 27 it doubles to:                    $ 18,600

At age 34 it doubles again to:         $ 37,200

At age 41 it’s:                                    $ 74,400

At age 48 it’s:                                    $ 148,800

At age 55 it’s:                                    $ 297,600

At age 62 it’s:                                    $ 595,200

And at retirement (age 67) it’s:        $1,003,000

You could also save $78 a month from age 20 to 67 to get the same million dollars. But that leaves 564 times you’re going to tempted to skip a month, be too broke, or forget to do it, and that risk is too big.

Why can’t every adult accomplish this? The answer is simply, because they didn’t save any money when they were much younger. The longer you wait, the less time your money has to double, and double up again. If you want the money when you’re 67 years old, but only start to save at age 41, you’ll end up with three fewer doubling periods and have about $150,000, instead of a million! In your case, at around age 20, the money has the time horizon to double almost seven times!

It’s your call – it’s your choice. If you don’t do it, you WILL remember having read this, as you start your retirement trying to live on $1,400 or so in monthly government pensions.