How to Save for Retirement: “Retirement Tax

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Are you paying your “retirement tax”?

As a Canadian consumer, you pay quite a bit in taxes.

If you live in the province of Ontario, for example, in addition to income and other types of taxes, you’re paying 13% in HST on the majority of your purchases.

For the most part, we accept paying sales tax as inevitable. Unless there’s a change to the tax rate, we don’t think much about that extra 13% that disappears from our wallets at the till.

Here’s a novel idea: what if we had a “tax” that we paid to ourselves?

What if we decided on a certain percentage to automatically put aside for our retirement. Let’s call it our Personal Retirement Tax (PRT).

The idea behind this is that there are many costs that we bear without question, simply because “that’s the way it is.” And yet when it comes to retirement, many experts suggest that Canadians aren’t financially prepared. Yet if we were forced to put aside a percentage of our income to finance retirement, we would simply accept that as inevitable.

So why not start paying yourself a Personal Retirement Tax?

If your net income is $40,000, for example, and you set your PRT at 13%, that’s $5,200 a year that you’d contribute to your retirement. Over time — say, 20 years — even with modest compound interest or returns on your investment, that could add up to a tidy nest egg of $160,000.*

In order to accumulate that nest egg, you’d only need to save $100 a week. Make it automatic — the same way you would if it were an actual tax being deducted from your pay — by setting up a savings plan to transfer the money each payday from your chequing account into your high interest savings or your RRSP.

Being a good saver is a state of mind. And making up your mind to pay yourself a PRT could just be the ticket to a leisurely retirement.

*Based on saving $100 a week and earning 4%, compounded monthly for 20 years, without factoring inflation. Example for illustrative purposes only.

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