Here in Canada, we have the RRSP or registered retirement savings plan. I’m sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren’t important to today’s discussion.
That topic is timing. If you are like most people who take advantage of this program, you make your deposit at the end of the year. This is the worst time to do it! For one thing, this puts a rather large payment right at the worst time of the year, when the Christmas bills are coming in and the heating bills are hitting the ceiling. For another, it means you are losing an opportunity to put away more money than the maximum and do it legally!
How can we put away more than we’re allowed? Easy! If you put the deposit away at the beginning of the year, by the end of the year when everyone else is making their deposits, you have the same amount as they do, plus a year’s interest!
In Canada there is another method that is slightly off the beaten path, but still within the letter of the law. If you make less than the amount that would allow you to make the top legal deposit, you still make your deposit at the start of the year, but you put in the top allowable deposit, then withdraw the overpayment amount at the end of the year. This way, you have your full legal deposit, the year’s interest on it, plus the interest on the overpayment sitting in your plan. These days, this isn’t a big deal as interest rates are at an all time low, but that ain’t gonna last my brothers and sisters. Anyone remember the 80’s and 18% mortgage rates? I did one of these for a client back then and it made a difference of a couple of grand for a single year!
As with anything I set out here, this is generalized information only. Before making decissions, please consult your own financial adviser and check up to date local laws and statutes. It’s easy to make a mistake that could cost you.
Yes, timing is important, but even more important in saving for your retirement is to do it! You know how much you’ll have come your retirement if you just sit there and think about it?
Zip! So no matter when, open a plan according to your country’s laws and make a deposit! If you can’t afford to make the maximum allowed deposit, put in something! Compound interest can work wonders, but it needs something to work on.
Have a great today and a better tomorrow.
-- The nicer the nice, the higher the price!