Harnessing the power of automatic contributions

 

The most recent Census data shows that 65% of Canadians are actively saving money for retirement. It’s an encouraging stat, because it illustrates that most of us understand that preparing for retirement is important. Unfortunately, that savings is increasingly falling short. According to Stats Canada, the average Canadian household savings rate fell to 1.4% in 2018—the lowest savings rate since 2005.

There are many reasons why Canadians are finding it challenging to save. Luckily, taking simple steps, like setting up automatic contributions, can make it much easier to grow your investments.

The science behind successful saving

Taking a disciplined approach to saving is challenging for many people, and it’s not just because of a lack of will power, or a society that encourages living and consuming in the present.

Science suggests that our brains have evolved to prioritize immediate needs over those that may arise in the future. This is why spending, not saving, gives us instant gratification. We also tend to prefer taking the easiest course of action, avoiding difficulty wherever possible. So, if you’ve never saved before, the task may be so daunting you avoid it altogether.

Thankfully, automatic contributions can help you side step both of these obstacles. By automating the contribution process, you eliminate the need to manually divert savings, as well as the temptation to spend the funds before they are invested. Your spending habits will quickly adjust around the contributions and your savings will grow.

Psychological and financial benefits

Making automatic contributions to your RRSP and/or TFSA ensures that your retirement savings grow consistently, with no effort required from you once they are set up.

In addition to the obvious financial benefit, recurring contributions give you the psychological benefit of knowing that you’re investing in your future, which can be a great source of financial confidence and security. Planning for retirement and building your nest egg means less stress. So you can more fully enjoy the present, knowing that your future is protected.

Finally, while many investors contribute regularly in the form of cash, and then invest it when the time is right, those who choose to invest recurring contributions enjoy another benefit: regularly investing regardless of what the market is doing.

This is an excellent strategy, and the opposite of attempting to time the market. For more on why this approach works, check out this article on dollar-cost averaging.

Making the most of your registered accounts

If you’re ready to set up automatic contributions to your RRSP or TFSA, it helps to know your contribution limits, so you can ensure you’re contributing enough to max them out, or to come as close as possible.

For 2019, your personal RRSP contribution limit is 18% of your pre-tax earned income for the previous year, up to a maximum of $26,500 (less if you have a company pension plan).

The TFSA limit is $6,000. Your notice of assessment from last year will state if you have unused contributions for both accounts.

For example, if your gross salary is $100,000, this would allow an $18,000 RRSP contribution. Saving $1,500 every month would maximize your contributions. Saving $500 per month would maximize your TFSA allowance.

Setting up a recurring contribution is simple with VirtualWealth

If you’re not using recurring contributions yet, VirtualWealth makes getting setup easy. Simply log in to your VirtualWealth account and from your Dashboard, select Funding. From there, choose Electronic funds transfer and you can add a financial institution and set up your automatic transfer in a single step.

Remember: while maxing out your contributions for retirement is the goal, don’t be discouraged if that’s not financially realistic for you right now. The point is just to save something—even if it’s a small amount—and to make the process as simple, consistent and effortless as possible.

Over time, whatever you’re contributing will compound, encouraging you to keep going, armed with an increasing sense of financial freedom and security.

 


References

Jonathan Chevreau. “The magic number for retirement savings is $756,000, according to poll of Canadians.” Financial Post. http://business.financialpost.com/personal-finance/the-magic-number-for-retirement-savings-is-756000-according-to-poll-of-canadians. February 8, 2018.

John Besheras, Katherine Milkman, Laura Burke, Alison Fahey “The science behind why you don’t save (and what to do about it).” Time Money. http://time.com/money/4417515/science-saving-emergency-expenses-behavior-economics/ July 26, 2016.

MP, DB, RRSP, DPSP, and TFSA limits and the YMPE.” Government of Canada. https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/pspa/mp-rrsp-dpsp-tfsa-limits-ympe.html December 21, 2017.

Hertzberg, Erik. “Canadian savings rate lowest in over a decade Stats Can says.” The Star Business Journal. https://www.thestar.com/business/2018/12/01/canadian-savings-rate-lowest-in-over-a-decade-stats-can-says.html December 1, 2018.

Heath, Jason. “The real reason people fail to save enough for retirement – and what you can do to limit the damage.” Financial Post. https://business.financialpost.com/personal-finance/retirement/the-real-reason-people-fail-to-save-enough-for-retirement-and-what-you-can-do-to-limit-the-damage. January 16, 2019.