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Procrastination will cost you retirement dollars By Tim Cestnick

Procrastination is a disease, I think. Some people just can't get things done.

Procrastination is acceptable when it comes to practising the bag pipes, taking off your socks to allow your feet to breathe, or maybe even airing out your hockey equipment. But make no mistake, procrastination, when it comes to saving for retirement isn't doing anyone any favours. It can cost you in assets, and income taxes.

So, this week, I'm inspired to write about something as basic as starting your retirement savings sooner rather than later. You see, I was reminded once again that each generation has to be educated on the fundamental truth that time is your biggest ally when it comes to financial security. Make sure your kids understand this.

The stories Consider the story of two investors. Ernest has always been a "do-it-now" kind of person. He decided to start saving for retirement at age 30. In fact, Ernest invested $5,000 every year from the age of 30, to age 40, for total contributions to his nest egg of $50,000 ($5,000 each year for 10 years). He then stopped his contributions and allowed the capital to grow from age 40 to age 65. He earned 8 per cent on his portfolio annually. At age 65, Ernest had $496,055 available for retirement.

The second investor in our story is Bertrand, Ernest's twin brother. Bertrand is a procrastinator. After watching Ernest save for retirement for a few years, he was finally convinced that he should start saving himself.

And so, at age 37, Bertrand started saving $5,000 each year, just as Ernest was doing. Bertrand saved $5,000 each year from age 37 to age 65 - a full 28 years. Bertrand's total contributions to his retirement savings amounted to $140,000 ($5,000 each year for 28 years). He earned the same 8 per cent as Ernest annually.

How much did Bertrand have available at age 65? Remember, he contributed $140,000 over the years, compared with Ernest's $50,000. The answer is $476,695.

Did you catch that? Although Bertrand contributed $90,000 more to his retirement savings than Ernest, and both earned the same rate of return, Bertrand ended up with $19,360 less in his portfolio than Ernest. The difference? Time. Ernest's money was working for him seven years sooner.

The advice So, the advice is simple. Start saving early. And if you're afraid that you haven't started early enough, forget about it, get on your horse, and start saving today. You won't gain anything by worrying about the past or delaying longer.

Next, it makes sense to use a registered retirement savings plan as a cornerstone of your retirement savings program. Why? Tax deferral.

You see, Ernest, in our story above, will have saved approximately $23,000 in income taxes (at a 46-per-cent marginal tax rate) if his $50,000 in contributions were made to an RRSP. These tax savings, if invested outside the RRSP at 5 per cent, after tax, annually, could amount to an additional $98,860 at age 65 for Ernest.

Also, if you're going to save for retirement both inside and outside an RRSP (perhaps because you haven't got sufficient RRSP contribution room, or you want to have some assets outside a registered plan), be sure to hold any interest-bearing investments inside the RRSP to the extent possible. If you're going to hold anything outside the RRSP, consider holding tax-efficient equity investments that have the potential for capital gains and dividend income. After all, capital gains and dividends are taxed at more favourable rates than interest income.

So, postpone your bag pipe rehearsal if you want. But don't neglect your retirement.

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