To enjoy a long, comfortable retirement, save more today.
– Suze Orman
Retirement.
What do you think about when you hear that word?
Rest? Relaxation? Adventure? Freedom?
Whatever thoughts the word “retirement” invokes, one thing is for sure – the time to start saving is now.
While retirement might feel pretty far off for some of us, the earlier you start saving, the better.
And although planning for retirement can feel pretty overwhelming, what if you could use your cash back rewards to start off your retirement nest egg on the right foot?
The truth is, every little bit helps. Whether:
- you’ve resolved to begin saving for retirement in 2019,
- you haven’t started thinking about saving for retirement just yet, or
- you’ve been working on your retirement for a while.
…there’s no time like the present.
So, imagine if you could start putting your cash back rewards to work for your retirement.
We’re going to let you know:
- a few investment basics,
- how compounding interest works, and
- how to use your credit card to save for retirement.
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Investing for retirement 101
One of the most common ways to save for retirement is to contribute to an RRSP.
With an RRSP, you get a tax deduction equal to your annual contributions. Any money earned within the RRSP will be tax free until it’s withdrawn. When withdrawn, it’s taxed at your marginal rate.
This strategy is useful for anyone looking to grow their rewards in a tax-sheltered manner.
Another way is to begin making contributions to a Tax-Free Savings Account (TFSA).
This account allows your money to grow tax free and any withdrawals from the account would not be taxed. The difference is the money is taxed before you put it in, so when you withdraw, you won’t be hit by paying tax on a large amount of money. This strategy is useful for anyone wanting to earn tax-free investment income.
Whether you choose to put your annual cash back rewards into an RRSP or TFSA, you’ll want to make sure you have contribution room available to use – your annual Notice of Assessment from CRA should have this information.
Whichever way you decide to go, you should consider starting now.
The sooner you start earning that interest, the better.
If you’re looking for a way to manage your own investments, CIBC Investor’s Edge offers the lowest trading fees for an online broker managed by a Big 5 bank:
CIBC Investor's Edge
How does the compounding of interest work?
Interest can either be simple or compounding.
Simple interest allows you to earn interest, but only on the amount you put in yourself, called the principal.
Compounding interest, on the other hand, allows you to earn interest not only on the principal balance, but it also takes any interest that you earn and adds it to the principal balance, allowing you to earn interest on the new total.
These two types of interest might not seem all that different, but you would be surprised how quickly these numbers can begin to pull away from one another.
If you invest $10,000 and earn 4% in simple interest, after 10 years you’ll have $14,000.
$10,000 * 4% = $400 * 10 years = $4,000
But if you invest that same $10,000 into a compounding interest account, you’ll have $14,802. That’s $800 dollars more.
| Year | Investment | Interest rate | Closing year end balance |
|---|---|---|---|
| 1 | $10,000 | 4% | $10,400 |
| 2 | $10,400 | 4% | $10,816 |
| 3 | $10,816 | 4% | $11,249 |
| 4 | $11,249 | 4% | $11,699 |
| 5 | $11,699 | 4% | $12,167 |
| 6 | $12,167 | 4% | $12,654 |
| 7 | $12,654 | 4% | $13,160 |
| 8 | $13,160 | 4% | $13,686 |
| 9 | $13,686 | 4% | $14,233 |
| 10 | $14,233 | 4% | $14,802 |
An $800 difference over 10 years might not seem like a lot, but what if you’re investing $100,000 for 40 years instead of $10,000 for 10?
With simple interest and an initial investment of $100,000, after 40 years, you’ll earn $60K in interest.
$100,000 * 4% = $400 * 40 years = $160,000
But with compounding interest, you’ll earn almost $400K in interest over that same 40 years.
$100,000 ( 1 + 0.04 )^ 40 years = $480,120
You’ll have 6 times as much money when you retire! Those numbers are that can’t be ignored.
Using a credit card to save for retirement
When people think about using their credit card, many simply think about using it to make day-to-day purchases and earning rewards along the way.
But imagine if you could take your credit card rewards and really put them to work…
The truth is, some credit cards offer stable and predictable annual rewards that could help you achieve some of your financial goals over time.
And what most might not realize is that their credit card rewards could be even used for saving for retirement.
Using a credit card that gives you cash back on all of your spending, and then investing that cash back is a very easy step you could take to help you save.
Plus, the more you can invest now, the less money you’ll need to save later on down the road as you approach retirement.
Investing your cash back rewards
Using cash back that you earned through a credit card to save for retirement has the following benefits:
- the cash back you invest will reap the benefits of compounding interest over time,
- it’s a great way to increase your current contribution without affecting your budget,
- there are potential tax benefits – you can put your cash into an RRSP (tax sheltered) or a TFSA (tax free), plus,
- some cash back credit cards have the option to put your rewards directly into an investment account – just set it and forget it.
BMO has a few cards that are really helpful if you’re looking to invest your rewards.
BMO CashBack World Elite Mastercard
The
So, if you want to take your investing to the next level, this could be the card for you.
It also gives you 10% cash back on all purchases for your first 3 months (up to $2,600 spent) and then up to 5% cash back on all your other purchases.
One really nice thing about this card is that you don’t need to wait for a whole year to redeem your cash back, instead you’ll be able to invest it as you earn it (as long as you’ve earned at least $1). And the sooner you invest it, the sooner you can start earning interest.
Not to mention, this card comes with one of the best insurance packages out there, and complimentary roadside assistance. Giving you peace of mind for the present, while helping you invest in your future.
GC: $150
$150 GeniusCash + Exclusive: Up to $480 bonus cash back + First year fee waived.*
BMO World Elite Mastercard
The
Although not technically a “cash back” card, it does allow you to take your points and invest them into a BMO Investment account.
The return for this card is a little lower than the cash back card above, but you’ll enjoy a pretty impressive welcome bonus of up to 30,000 bonus points, and the annual fee will be waived for the first year.
With another comprehensive insurance package and some exclusive travel perks, this card is great for anyone who travels a lot and wants to save for their retirement in the meantime.
GC: $125
Maximizing your cash back rewards
A really great way to maximize your cash back rewards is to be sure to know which cards to use where.
The
Additionally, you could earn 4% back on even more of your purchases by buying gift cards for stores in other spend categories (such as electronics, clothing, or retail stores) at grocery stores. You’ll earn 4% on those purchases as well.
Another great strategy is to have a few different cards in your wallet, allowing you to use different cards for different types of purchases.
Other noteworthy cards include:
- The
Tangerine Money-Back Credit Card will give you 2% cash back on up to 3 categories of your choice. - The
SimplyCash® Preferred Card from American Express pays 2% on all purchases. - The
TD Cash Back Visa Infinite* Card gives you 3% cash back on your recurring bill payments, plus your grocery and gas purchases.
Whatever combination of cards you use, just make sure you use the card (or cards) that is best for you, your spending, and your saving goals.
And above all, don’t be tempted to overspend in order to earn more. The point of this is to invest in your future, not fill your future with credit card debt.
It’s time to hear from you
Do you have any tips on saving for retirement that you’d like to share with our readers?
When did you start saving?
We’d love to hear from you in the comments below.
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