Even a small increase in investment performance on retirement savings can make a big difference in the long term. As this graph shows, the performance gap between an investment portfolio earning 8%, 10%, and 12% may not seem impressive in the short term. But once you invest for 10 years or more, the payoff for improving your returns by just 2% can be substantial.
If you’re not sure that you’re on track to meet your goals, it may be time for a portfolio review.
A Short Lesson on the importance of investing EARLY…
The following is an example of two people who both invest a total of $48,000 into mutual funds until their retirement age of 65. Which portfolio do you think will be worth more?
|
Age |
Monthly |
Interest made on |
Value of Investment |
|
25 year old |
$100 |
10% |
$584,222 |
|
|
|
|
|
|
45 year old |
$200 |
10% |
$151,206 |
- In this investment example, TIME is the most important factor when calculating why there is such a difference on the value of investments when both investors reach age 65.
- Even though both individuals invested $48,000 by the time they reach 65 the fact that the 25 yr. old started earlier and had TIME for his/her money to grow and compound, explains why this portfolio was able to grow to a much higher value.
How would you want $100 per month to work for you over the next 20 years?
|
1 |
$100 a month towards a fixed GIC rate of 6% invested into a RRSP |
$44,143 |
|
2 |
$100 a month invested into a mutual fund RRSP with an average compound rate of return of 10% |
$68,730 |
|
3 |
$100 a month servicing $20,000 borrowed from the bank. Borrowing at 6% a year amounts to $1,200 per year in interest payments (which is fully tax deductible) or $100 per month. This money would then be invested into the same mutual fund, as mentioned above earning 10% average returns per year. This $20,000 is invested as a non-RRSP investment. Interest only payments are made to the bank |
$134,550 |
Now you cash out of your investment…
|
|
1 |
2 |
3 |
|
|
$44,143 |
$68,730 |
$134,550 |
|
Less bank loan |
----------- |
----------- |
$ 20,000 |
|
Gross Earnings |
$44,143 |
$68,730 |
$114,550 |
|
Less taxes (assuming 40% tax bracket) |
$17,657 |
$27,492 |
$ 22,910* |
|
After tax investment |
$26,486 |
$41,238 |
$ 91,640 |
* The $114,550 profit earned from the mutual fund was earned by capital gains bearing investments. CCRA (also known as Revenue Canada) allows you to make 50% tax-free returns on capital gain investments. Therefore, the gross profit of $114,550 earned means half of that (or $57,275 is tax-free profit). The remaining half of $57,275 is taxable and at a 40% tax rate, $22,910 is lost to tax.
- This investment idea has allowed you to save income taxes in 2 ways...
- The capital gains rule allows you to earn tax-free profits on 50% of your investment gains
- $1,200 interest payment creates an income tax deduction and cash refund, like a RRSP contribution
All 3 investors spent $100 per month on their investments..
HOW WOULD YOU WANT YOUR $100 TO WORK FOR YOU?
(Click here for Leverage Disclosure)
