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A Retirement Savings Plan (also called A Registered Retirement Savings Plan – RRSP) is a very common type of account for investment assets and for holding savings. The main purpose of using this plan is to provide a decent pension accumulation over a long period of person’s life. The plan selection is based on several parameters that impact most on the result of RRSP. These parameters are investment rate of return (in percent, annually), inflation rate (in percent, annually), the amount of income expected (by years) and federal income tax rate (in percent, annually). All these parameters may change in time, that’s why, is necessary to provide a reliable planning. A mechanism for planning is following - you accumulate a certain amount of the annual salary for 10-40 years of life. At the end of the term, you get the planned amount.
In my opinion, starting date is the primary parameter, which affects RRSP the most. For example, if you start to save money with RRSP at age 25 with a purpose to save some money at age 65, you should save just only 3-5% of your annual salary. But if you start too late (for example, at age 55), you savings will take almost all your salary for the same amount of money.
That’s why as earlier you start to save money, as easier it will be for your budget.
The investment rate of interest is the annual rate at which interest is paid from amount of your savings. Obviously, larger rate of interest is more profitable. With lesser rate of interest you should invest more each year to receive the same amount of money, compared to larger rate. But we have to understand, that this rate may change from year to year, and this is an important moment while you creating your own RRSP.
The federal income tax rate depends on the amount of taxable income. Usually it starts from 10% and to more than 40%, depending on the amount of income, marital status of the taxpayer and may be different from year to year. The amount of this tax the taxpayer pays into federal budget, hence, he can put on his saving account only the money that will remain after taxation.
Inflation, in this case, is a rise in the general level of prices of goods and services in an economy over a period of time. This mean, that after some certain period of time you won’t be able to buy the same goods, like before this period. That’s why you must take into consideration the impact of inflation on your money in future. Each dollar you will receive in the end of RRSP will be not equal to the “today” dollar.
