How You Can Save 6.2% and Still Make 10% of Your Salary in RRSP Contributions

If your long-term savings plan is to put 10% of your salary into an RRSP, you might be surprised that you can do that by only putting 6.2% of each paycheck into your RRSP account and you can do this, every year.  What's the catch?  The only catch is that you will need to save 10% in the first year (only the first year though) and you must put your tax refund check into your RRSP account every year.
    It sounds incredibly simple, but the math checks out and it is relatively easy to do.  The hardest part will be the first year, where you will need to pay yourself first at a 10% rate.  Now if you can't do that, no problem.  Just sticking with a 6.2% savings rate will get you close to the 10% contribution rate within a few years.


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Credit Card Nerd Math

We will run examples on how much you will need to put away each pay check in order to achieve a long term contribution rate.  In the first two examples, you will need to save 10% per pay check, for the first year only.  In the final example you will need to save 18% per pay check in the first year only.

    The first example is someone that has a $35,000 annual salary in Manitoba.  The combined marginal tax rate for this individual would be 27.75%.  In year one they would contribute 10% each pay period, which would work out to $3500 in RRSP contributions.  In year two and beyond you would contribute only 7.2% each pay period and still have $3500 in RRSP contributions for each year.  All you have to do is keep putting your tax refund into this year's RRSP.  The math works like this.  In 2017 you will get a tax refund of ($3500 x 27.75%) = $971.25.  You will now only need to save ($3500 - 971.25) = $2528.75 during 2017.  This works out to $2528.75 ÷ $35,000 = 7.225%.  You can continue to only save 7.2% each year and contribute 10% of your earnings each year if you continually put your tax refund into your RRSP.  The savings rate is $97.26 bi-weekly, $210.73 a month or $6.92 a day for this example.

    The next example will have some one that earns $75,000 annually in Manitoba.  This individual will have a marginal tax rate of 37.9%.  Just like the previous example, this individual will need to contribute 10% of their earnings in the first year.  In the second year they would only need to save 6.2% each pay period.  The second year you will have a tax refund of ($7,500 x 37.9%) = $2842.50, which means if you want to contribute 10% of your salary, all you would need to do is save ($7,500 - $2842.50) = $4,657.50.  This works out to ($4,647.50 ÷ $75,000) = 6.21%.   Just like above you can continue to save only 6.2% each pay period and still put 10% of your wage into your RRSP every year.  The savings rate is $179.13 bi-weekly, $388.13 a month or $12.75 a day for this example.

    With the same $75,000 salary in Manitoba, but with a 18% contribution goal, you can save 11.5% per pay check after the first year.  The first year you will need to make $13,500 in RRSP contributions.  In all the following years you will get an expected tax refund of ($8,000 x 37.9% + $5,500 x 33.25%) = $4,860.75, which means you will need to save ($13,500 - $4,860.75) = $8,639.25 during the rest of the year.  This works out to a savings rate of ($8,639.25 ÷ $75,000) = 11.519% or just above the savings rate for the first year if you want to contribute 10% annually.  The savings rate is $332.28 bi-weekly, $719.94 a month or $23.65 a day for this example.



Starting and Maintaining a 6.2% Saving Rate to get to a 10% Contribution Rate

If you don't have the ability to save at a 10% initial rate, don't sweat it too much.  Even at a 6.2% saving rate, you will work your way up to a rate that is close to the 10% contribution rate quickly enough.  In as little as three or four years, you will be near your contribution goal!  Just to be clear, each year you will be putting $4,650 aside, which is about $178.85 per bi-weekly pay period.  The amount saved each pay period does not increase throughout the years in this demonstration.


6.2% RRSP Savings Rate and Contribution Rate on $75,000 Salary in Manitoba

Year

Refund

Contribution Rate

1

$0

6.2%

2

$1762.35

8.5%

3

$2430.28

9.4%

4

$2683.43

9.8%

5

$2779.37

9.9%

6

$2815.73

9.95%

7

$2829.51

9.97%

8

$2834.73

9.98%

Eventually

$2,850.00

10%



Starting and Maintaining a 11.5% Saving Rate to get to a 18% Contribution Rate

Next we will show you how long a 11.5% savings rate will take before you get close to a 18% contribution rate if you are unable to save the initial 18% in the first year.  Don't worry, just like the 10% contribution with a 6.2% savings rate, the 11.5% savings rate will quickly be contributing close to the full 18% rate.  Just to be clear, each year you will only be saving $332.28 from each of your pay checks, the actual amount you put aside is always the same every year.


11.5% RRSP Savings Rate and Contribution Rate on $75,000 Salary in Manitoba

Year

Refund

Contribution Rate

1

$0

11.50%

2

$3,239.81

15.82%

3

$4,317.05

17.26%

4

$4,675.23

17.73%

5

$4,794.33

17.89%

6

$4833.93

17.95%

Eventually

$4,875.00

18%


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A Wake Up Call

None or our examples use RRSP loans.  All you have to do is to continually put your refund into your RRSP and keep the same savings rate going.  The demonstrations above show a wage that doesn't increase over time.  If you want to factor in a wage increase, you will need to save the full contribution rate of your raise.  Not really a huge deal though, because a 3% raise with a 18% contribution rate would be an increase of (3% x 18%) = 0.54% or just above half of one percent of your annual salary.  If you are trying to have a 10% contribution rate, the same 3% raise will require a 0.3% additional savings rate, which is $4.04 a pay check if you are earning $35,000 a year.
    You can also decide to continue on at the regular savings rate, without much of a drag on your contribution rate.  For example, if you get a 3% raise in year four, your contribution rate would be 17.55% if you stuck to the same savings percentage.  (($75,000 x 1.03 x 11.5%) + $4,675.23) ÷ ($75,000 x 1.03) = 17.55% instead of the regular 17.73% that you would have contributed if you would have saved 17.73% of your 3% raise.  This method is also a lot easier to calculate your bi-weekly contributions.