Everything You've Been Taught About How To Save For Retirement Is Backwards

The longer your money is in the account, the more time it has to grow

Oh, retirement. The most overwhelmingly important part of your future that no one prepared you for yet everyone expects you to understand. Yeah, that one. If you are curious about money, which I’ll assume you are if you’re reading this right now, you’re probably just dying (pun intended) to know how much you’ll need when you decide you’re ready to stop working.

A couple of questions come to mind: How the hell do you save for retirement and how much money do you need to put aside for retirement?

When you first found out how much you’re supposed to save for retirement, you probably had a minor panic attack. If you haven’t found out how much they predict you’ll need, let me really, truly brighten your day.


Three quarters of a million dollars is the magic number a CIBC survey found that Canadians were striving to achieve for their retirement funds. To be honest, it’s a lot less scary than what the Americans are told they should save, which is a whopping $1.25 million — that is, if you want to play golf and live by a beach, which honestly, who doesn’t?

How much should you save for retirement each year?

Most financial experts will tell you to save 10% of your income towards retirement, and to take advantage of your employee matching programs. Is that bad advice? Absolutely not. The only problem with the percentage rule is that typically, when you are in your early 20s, you are earning an entry level salary. Therefore, 10% of your annual income may only account to $4,000, if not less.

But it’s okay. Your income will increase and therefore, so will your contributions, right? Of course. It makes sense. If you increase your contributions as you get older, you will eventually have the salary to back those needs. However true it may be, it’s not your best option. For the sake of earning as much capital gains and interest as possible, this notion of “save more when you’re older” is actually very backwards.

You need to maximize your earnings

To maximize your retirement earnings, the key to all of your financial hopes and dreams is our friend, compounding. Compounding is when an asset, or your retirement money invested in a tax-sheltered account, gathers earnings from capital gains or interest. From there, any earned money is reinvested to generate more earnings over a period of time — typically annually. This type of growth happens because your initial investment generates earnings from the original principal, or your original sum invested, as well as the earnings you accumulate just from investing your money. Pretty cool, hey?

Let’s look at an example for all of our visual learners out there. Say you invest $1,000 into an investment account that earns around 5% interest annually. After the compounding period, your total would be $1,050. In the second period of time, the investment would earn an additional 5% on the principal amount and the $50 earned in interest, which means you would earn another $50 which brings your total earnings to $1,105. This same pattern would continue for as long as you keep the money invested, and that’s without adding more of your own money to the account. In other words, it’s a pretty sweet deal.

You need to save more money while you’re young

Now that we know the common mindset when it comes to saving for retirement tells you to save what you can and increase your amounts as you increase your income, what does it all mean?

The longer your money is in your tax-sheltered retirement account, the more time it has to grow through compounding. Therefore, something crucial to think about is the fact that you should be investing as much as you possibly can early on so that your money has longer to grow. As you reach 40-60 years of age, you’ll end up earning less interest on your gains than if you had invested that money when you’re younger.

Not only that, but you may have less expenses in your 20s as opposed to when you’re in your 30s. It’s easy to assume that more money earned equals more money saved — but you and I both know that it’s more likely to go the way that more money earned equals more money spent.

Rather than lecture you on why you need to invest more money younger, let’s look at the numbers.

Shirley is 20 years old and earns $45,000 at her entry-level job. She’s ready to start contributing to her tax-sheltered retirement account. She has two options: invest a lot, or invest a little.

Option one: invest a lot

Shirley starts by putting $1,000 into the account and plans to contribute $8,000 more this year, which means that she would be saving 20% of her income towards retirement. That’s double what the numbers tell her to do, but Shirley read a personal finance book and she’s now a money queen.

Shirley doesn’t plan to retire until 65 years old, because she hasn’t found FIRE blogs yet and also, she loves to work. This means she has 45 years to save for retirement. Her account will earn her 5% annual interest.

Come 65-years-old, Shirley will have a whopping $1,350,466.32 at retirement, and that’s if she doesn’t increase her contributions later in life.

Option two: invest a little

Shirley does the same, and starts by putting $1,000 into her retirement account. From there, she plans to contribute $3,500 more this year, which means that she would be saving 10% of her income towards retirement. That’s exactly what the personal finance books she’s read told her to do. Good job, Shirley.

Shirley doesn’t plan to retire until 65 years old, because (shockingly) she loves to work, which is totally allowed. This means she has 45 years to save for retirement. Her account will earn her a 5% annual interest.

Shirley will have $595,883.08 at retirement. Oh no! Shirley knows she’ll need more than that piddly income at retirement. To make up for lost time, Shirley decides to up her contributions later in life when she’s earning a higher income. Unfortunately, due to having a child, she is still earning the same income. It’s okay, though. Shirley decides that at 40, she’ll put 20% of her income towards retirement. This will earn her an additional $404,293.99, bringing her total to $1,000,177.07. By choosing to invest more later, Shirley missed out on over $300,000 of capital gains and interest.

I hope you can laugh with me and realize that this is a total dramatization. But, I’ve seen crazier and I also wanted to make my point. Success? Oui.

Where can you save your retirement fund?

Now that you know when and why you should save for your retirement, like, yesterday. Let’s talk about where you can save your money.

In retirement, you need enough money to serve as your only source of income. Therefore, it’s important that you build a large enough “nest egg” to last you from the day you retire until the day you pass away. The government standard age for retirement is 65 — but that choice is entirely yours. Regardless, you will likely need enough money to last you, let’s say, 30 years.

One way to ensure that this happens is by investing the money into stocks within a tax-sheltered account. On average, and depending on your risk tolerance, you will receive a return of 7% to 8% by investing your money.

Other options for where to save your retirement money include a group retirement account offered by your employer (bonus points if they have a matching program) or your own retirement account like a TFSA or RRSP. You can also put your money into any regular investment account, but be aware that there are no tax advantages to this, meaning you will be taxed for any capital gains earned on that asset.

If you’re unsure which one is best for you, I recommend speaking with a fee-based financial planner for any of your needs.

Retirement is not all doom and gloom

I know, it’s a lot to take in and honestly, I’m sure a lot of you are thinking “Shirley is only 20 and I’m 30 and I haven’t done anything like this and omg I’m never going to retire.”

Hey, I get it. Me too. I didn’t start investing until 25, and even then, I didn’t put a ton of my income towards my retirement. Therefore, I have a lot of ground to make up — but this kind of thing happens every single day.

All we can focus on now is trying to find a percentage that works, and playing around with the numbers to see what we can do to make the best of our situation. Retirement will come. You will save enough. You are already doing more than most. And you are just as much of a money queen as Shirley. I promise.

When it comes to retirement, starting young can only help you as much as you let it. But if you do contribute as much as you can and still feel like it’s not enough, it is.