Morningstar Money Challenge: Day 13

Today's Task: Open a retirement account

Ruth Saldanha 17 November, 2020 | 12:30PM
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This article is a part of a month-long Morningstar Money Challenge. You can find the details here.

The more superstitious among us may want to skip today’s task (#13), but please, don’t. It is critically important that you open a retirement account as early as you can, even if you can’t save very much in it at all.

Michael Pe, a product manager at Morningstar CPMS says that starting to invest early is his number one investment lesson.

“When started my career, it took me years before getting comfortable with investing in the stock market. I wanted to educate myself before investing my hard-earned savings. However, I realized later that those few years cost me immensely. If I had started investing 5 years earlier, my predicted future portfolio value at retirement would be significantly higher than it is now,” he rues.

Here’s the math he provided. Let’s take an example of Person A, 30 years of age starting to save and invest $300 a month until they are 60, at which time they will retire. Assuming an 8% annual return (the average return on the S&P/TSX Composite for the last 40 years), they would roughly have $447,000 in their portfolio at age 60.

Now let’s instead consider Person B, who did the same thing as Person A, but started investing 5 years earlier at age 25. At $300 a month, that would amount to an additional $18,000 being invested vs. Person A. However, Person B would have $688,000 at retirement instead of $447,000 like Person A. That is a difference of over $241,000 for investing 5 years earlier!

Wow, that’s a lot!

Additional Reading
-          Your First Date With Your RRSP
-          How Much to Save?
-          Should Young People Buy Stocks? 

Morningstar’s director of investor education Karen Wallace often hears people complain about how they can't afford to contribute to my retirement account right now, so they might someday. That’s understandable, especially if you’re just starting you, you might be saddled with student debt, saving for short-term goals like a car, or a down payment on a home.

Contributing to an RRSP would be nice, but it's just not going to happen right now.

“But it really is worthwhile to save whatever you can afford to, even if it doesn't seem like much. I think of money invested in your 20s and 30s as “super dollars”: with several decades to compound, this money has incredible growth potential. One dollar compounding at 6% per year will be worth $10.30 in 40 years. One dollar compounding at 6% will only be worth a third of that, $3.20, after 20 years,” she says.

Put simply, the younger you are when you start investing, the more time your money has to grow and the less money you will need to save to reach your goal. By contrast, the longer you wait, the less "super" your dollars get.

Here’s how she explains it. The money in your retirement savings account is made up of principal (the money you contribute from your paycheck) and the interest earned on that principal. If you start contributing at age 25 rather than age 45, you have more opportunities to make contributions, meaning your individual contributions don't need to be as large to amass the same amount come retirement. That part's pretty obvious. But there are also more periods over which your principal will compound, which means the money you contribute will earn more interest -- the interest on top of interest. That's why these early contributions are superdollars -- these early dollars you invested are worth a lot more come retirement than later contributions are.

Additional Reading
-          Turn Dollars into Super Dollars
-          RRSP: You Need A Plan
-          RESP: Start NOW

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About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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