basic financial planning #11: Retirement planning and timing.

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Blog entry by BigTiny posted 04-20-2011 04:53 AM 3523 reads 0 times favorited 12 comments Add to Favorites Watch
« Part 10: Getting a jump on going pro Part 11 of basic financial planning series Part 12: A couple of minutes very well spent. »

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!

12 comments so far

View a1Jim's profile


117127 posts in 3605 days

#1 posted 04-20-2011 05:01 AM

Your whole series has great advise. If only I would have been smart enough to know all that have put forward and do it before retirement age. Now I’m like many others trying to figure out how to live on Social security. If your young enough listen to Paul and take his advise so your not in the same situation when your at retirement age.

-- wood crafting & woodworking classes

View Popsnsons's profile


387 posts in 3010 days

#2 posted 04-20-2011 05:11 AM

Amen brother…and get the kids to start thinking in that mode early in life. They’ll thank you down the road.

-- Pops ~ In So Cal...

View pjones46's profile


1001 posts in 2671 days

#3 posted 04-20-2011 05:38 AM

Unfortunately here in the US there are many who are of the opinion that the government will take care of them. Many do not listen to those that have gone before and we also must change that mind set. My parents came from Canada to the US back in the 20’s and instilled in their kids a work ethic which is fast becoming a thing of the past.

You must put away today for those tomorrows to which you look forward. It is no joke, every penny will grow and in 25-40 years you will be rewarded.

Thanks for the reminder and the good advice, keep it coming.

-- Respectfully, Paul

View BigTiny's profile


1676 posts in 2916 days

#4 posted 04-20-2011 05:41 AM

If only we could get the younger set interested in this. At 12% interest, $1,000 deposited at age 18 will grow to about a quarter of a million dollars by age 65! Wait until age 30 to make that deposit and at age 65 you end up with only about $ 64,000. Do it at age 42 and at age 65 you get back only around $16,000, a fraction of what you’d have gotten if you had done it at age 18.

Looking at it the other way, to get a quarter million at 65, we’ve seen that the 18 year old only had to put away $1,000.
Wait until age 24 and it takes $2,000. Age 30 and it’s $4,000. By 42 you’d need $16,000 and by 54 you’d have to deposit a whopping $64,000 to end up with the same as the 18 year old fot for his one grand.

Time can be your friend, or your enemy. It’s your choice.

-- The nicer the nice, the higher the price!

View Sheila Landry (scrollgirl)'s profile

Sheila Landry (scrollgirl)

9231 posts in 2948 days

#5 posted 04-20-2011 01:33 PM

I wish you were my friend when I was 18! I often wonder why there isn’t a mandatory class in high school for financial planning. I think it would set the tone right for young people and even if they slept through most of it, some of it would certainly stick!

Thank you again Paul for a wonderful series and all the great information you are sharing. Your posts are simple enough for everyone to understand, yet by taking small steps the effects can be quite profound to our financial health. Great blog again!


-- Designer/Artist/Teacher. Owner of Sheila Landry Designs ( Scroll saw, wood working and painting patterns and surfaces. "Knowledge is Power"

View GMman's profile


3902 posts in 3725 days

#6 posted 04-20-2011 02:30 PM

Great advise you’re giving Paul, while going to school I always had part time jobs and I finished high school in 1959 in 1960 I started working now with my part time jobs I had enough money saved to buy a good 2nd hand car and I still was saving, money grows fast and at the age of 53 I had enough to retired I don’t own any money all I have house , vehicles are paid cash after I buy a new vehicle cash I always open a saving account for my next one with good interest and my next vehicle I pay cash instead of paying the finance company I pay in my own account.
But today’s kids go to Universities and come out with a dept of $50000 and jobs today are hard to get so it makes it hard for them to save.
I have a grand daughter that will be out next year with $50000 in dept.

View chrisstef's profile


17428 posts in 3034 days

#7 posted 04-20-2011 06:32 PM

I can remember working at the lumberyard at 18 years old and can remember my friends old man making him put aside $2,000 each year to put into a Roth and at the time i had no idea what a Roth was. Looking back on it i wish i took some of his advise. I have been fortunate enough to go through business school and come out debt free due to an accident settlement i was awarded at 16 and started my 401k at 25. Putting the money away is a hard pill to swallow at first but once you see it grow it can be very encouraging. Every time i get a raise (which is never enough lol ) i set aside another 1% in the retirement, this way i never realize or feel the money coming out.

Tiny, youve put out some great words of wisdom in this piece and hopefully you catch one of the younger folks and they listen to you.

Sheila, I think you make a great point about putting financial planning in the curriculum at the schools. It woiuld be a huge eye opener to a lot of kids. Hopefully they wont get caught up like everyone else did when they were borrowing the farm before the market took a dump.

-- Its not a crack, its a casting imperfection.

View BigTiny's profile


1676 posts in 2916 days

#8 posted 04-20-2011 09:58 PM

The schools and universities are so busy teaching folks how to make a buck, they don’t bother teaching them what to do with it once they have it!

-- The nicer the nice, the higher the price!

View bunkie's profile


412 posts in 3175 days

#9 posted 04-20-2011 10:16 PM

While completely agree with the principle, there’s no such thing as sustained, year-after-year 12% compound interest. The people who believed that are cursing themselves for trusting Bernie Madoff with their savings.

-- Altruism is, ultimately, self-serving

View pjones46's profile


1001 posts in 2671 days

#10 posted 04-21-2011 01:08 AM

In most cases, if it sounds too good to be true, then it’s probably not true. The point is, that over the long run and not starting with all of your life savings, there will be a gain rather it be 2 ½ %, 3 ½ %, or 12% and the earlier you start the more you gain.

The stock market is a crap shoot and you have to be willing to lose if you invest, but, also what entices people is the high gains which they may accumulate if they are lucky.

The older you get you can’t afford to take high risks so extremely conservative approaches must be taken even if the Bernie Madoff’s of the world make it sound so easy. It’s not easy. Sorry, get over it, you can’t get rich quick unless someone leaves it to you or you start at an early age and save, save, save.

-- Respectfully, Paul

View BigTiny's profile


1676 posts in 2916 days

#11 posted 04-21-2011 01:39 AM

I know what you mean about the stock market, having taken a $30,000 hit in the recent collapse myself. Thankfully, most of my assets were out of the market by then, and the stocks I did retain are more that double the value they bottomed out at, so it wasn’t a total loss.

I used to tell my clients that they should have a mix of assets, both interest bearing and equity based, and they should slowly increase the interest based portion and lessen their equity holdingsas they got older and less able to weather a downturn in the markets.

Still, even if they had all their savings in the market when it took the tumble, at least they had some savings, which is more than most people can say. North Americans are in debt to a level never before seen today, and when (not if, when) rates go back up, a lot of them are going to be facing a lot of trouble trying to pay the interest on those debts.

I feel sorry for them.

-- The nicer the nice, the higher the price!

View AmandasHusband's profile


58 posts in 2721 days

#12 posted 05-19-2011 08:55 PM

About 5 years ago my dad turned me on to this book Automatic Millionaire by David Bach.

It’s a very good book for going over the basics about putting away for retirement and the power of compound interest.

After I read that book I got serious about my 401k and retirement planning. He really harped on putting atleast 1 hour of pay every day into your retirement. A mere 5 hours of pay each week. Which comes out to 12%.

It’s important. And the sooner one realizes this the better off they’ll be come retirement age.

-- In this world there's two kinds of people my friend. Those with loaded guns and those who dig. You dig.

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