Start early to leverage the power of compounding
The sooner you make it a priority to invest for your retirement goals, the better.
When time is on your side, it's a huge ally. The earlier you start, the more you benefit from the power of compounding. Compounding occurs when the returns that your investments earn begin to generate a return.
In a registered retirement savings plan (RRSP), compounding is unhindered. You can reinvest your gains, including your dividend and interest income, without paying any tax, as long as the funds remain within the RRSP account.
The chart below shows the incredible impact that compounding has on your RRSP savings, and why it's better to start investing as early as you can.
Starting at different ages, monthly investments required to reach $500,000 by age 65
Start at age 25
Start at age 35
Start at age 45
Value at age 65
Portion from compound growth
Source: Credential Qtrade Securities Inc. Scenarios assume an average 5.5% annual rate of return.
To leverage the power of compounding, it's a good idea to hardwire the habit of saving and investing. Set up a regular contribution plan to move a set amount of money automatically every month from your banking account to your self-directed RRSP, and invest that money to get it working on your behalf. You'll quickly adjust your budget and your lifestyle around that monthly commitment, and you'll avoid the stress of coming up with a single lump-sum contribution at the RRSP deadline.
DRIPs make it easy to re-invest dividends automatically
Keep your money invested, re-invested and compounding, by setting up a dividend reinvestment plan ("DRIP") for dividend-paying stocks that you own. With a DRIP, stock dividend payments are automatically used to buy more shares in the company. No commissions are charged for DRIP share purchases.
Qtrade Direct Investing offers both Canadian and U.S. DRIPs free of charge. Simply log in to your Qtrade account and go to Accounts > Service Centre > Dividend Reinvestment. For each of your accounts, you’ll see a list of DRIP-eligible securities. You can select “Active” next to the security you want to enrol in the DRIP program. Read and agree to the terms and save your changes.