How an RRSP calculator works [with real calculator you can use!]

Investment and retirement planning do not stop at having a Registered Retirement Savings Plan (RRSP). It is also important to know how many contributions you should make to maximize your RRSP and to also help you secure your future income. To know these actual numbers, you can use a tool called RRSP calculator.

What is an RRSP calculator?

A Canadian RRSP calculator will provide you with an estimated value of how much your RRSP contributions will grow over the next few years, or when you reach retirement age.

Based on these estimates and your retirement goals, you can determine how much in contributions you should maintain.

In short, this tool will let you know how much you should diligently sow (your contributions), by having an estimate of what you may reap when the right time comes (your total savings at the time of your retirement).

An RRSP calculator you can use

Here is an RRSP calculator that you can use free of charge:

Continue reading below to learn more about how to use the RRSP calculator, the different factors affecting such computation, and the common mistakes in using this tool.

How does the RRSP calculator work?

When using an RRSP calculator, it’s important to use correct information to get a more realistic and accurate result.

Here’s how this calculator works:

Factors

There are numerous factors that the RRSP calculators use to arrive at the amount of your total savings when you retire. These factors are what you’ll be putting into the calculator, which you must prepare before using it.

These factors or data include:

• Amount in RRSP Account: the amount of your current RRSP savings, if you already have one. You can put 0 if you have none.
• Rate of Return While Working: the rate of return of your contributions while you’re still working. This will depend on your investment type or style, or your province’s rate. It usually ranges from 2% to 7% for a more realistic result.
• Annual Contributions: your planned contributions. You can arrive at this amount by summing up your weekly, monthly, or periodic contributions.
• Years in Retirement: the age that you plan to retire, or the maximum age of contributing to the RRSP, which is 71 years old.
• Rate of Return While Retired: the rate of return of your contributions after your retirement. This will still be based on your investment type or style, or your province’s rate. This is usually pegged at 10% or lower.
• Current Age: your age right now.
• Years Until Retirement: how many years are left before you retire.

Interpreting the results

The main result of these calculators will show you the estimated amount of your RRSP balance by the time you’ve reached the retirement age you’ve put in it.

This amount is calculated based on the interest rates you’ve indicated and by how long you’re going to contribute to your RRSP.

1: Adjust different scenarios – contributions

You can look at different scenarios to arrive at the results that you want. This may include adjusting the factors that you have control over, such as your annual (or weekly or monthly) contributions.

2: Independent factors – rate of return

There are other factors in RRSP calculators that you cannot control – such as your age and the rates of return or interest rates.

You can look at the different rates of return of each qualified investment that can be held in an RRSP. This will also vary with every financial institution.

• High-interest Savings Account: ranges from 3% to 6%. It’s a much more stable qualified investment, although its rate of return is not expected to go any lower or higher.
• Guaranteed Investment Certificate (GIC): ranges from 4% to 6%. It will depend on the predetermined period (1-year term up to 5-year term) and the fixed rate of return offered by your financial institution.

Other forms of qualified investments include mutual funds and exchange traded funds (ETFs), whose “returns” depend on the distributions as these funds are being traded.

Learn the difference between mutual funds vs GIC here.

While you can’t dictate the rate of return that these qualified investments offer, you can still choose which type you are more comfortable with.

3: Comparisons – existing RRSP

If you already have existing funds in an RRSP account, you can also compare its estimated RRSP balance by the time you’ve retired versus your retirement goals.

By using RRSP calculators, you could calculate how much you should contribute monthly or yearly, based on your current RRSP funds and your desired retirement income.

What are the benefits of using an RRSP calculator?

Using RRSP calculators offers various benefits. However, you should also be wary of its limitations and some of the common mistakes when using this tool.

Here are some of the benefits that might encourage you to use this calculator:

Financial clarity

These calculators can help you see your future when it comes to your finances, especially at the time of your retirement. It's important to know these details. By retirement, working would become nearly impossible or your other sources of income may be limited.

Setting goals

Planning your retirement goals is difficult when you can’t see a number to work with. By using a calculator, you can determine whether you are saving enough for your RRSP to earn according to your target. It will also motivate you to set your goals and to work harder for your future.

Supported decision making

When you use RRSP calculators, you’re confident that your decision on how much to contribute to your RRSP is an informed and concrete one. It ensures that the amount of your RRSP contributions are not out-of-the-blue estimations.

Adjust any time

When any of your personal factors change, RRSP calculators can show how these changes might affect your RRSP earnings by the time you’ve retired.

Some of these changes may be positive. An increase in your annual income, for example, can allow you to increase your regular contributions.

You can also check for any significant effects on your RRSP when you need to downgrade your investment plan.

Visualized results

If you’re having a difficult time visualizing your desired retirement income, or if you’re easily overwhelmed when looking at numbers, RRSP calculators are the best tool for you. It can also break down numbers by each factor through the use of charts and graphs.

What common mistakes must be avoided when using an RRSP calculator?

For all the benefits it offers, an RRSP calculator can also have some limitations. Below are some common mistakes to avoid when using the tool:

Calculator’s assumptions

Know that there are certain assumptions that the RRSP calculator must make when you’re using it. It’s important to read some of the assumptions which affect the numbers it generates. This applies to the RRSP calculator we shared here, or one provided by your financial institution.

Whatever details are not asked in the calculator are the assumptions it makes for you.

Some of these assumptions that these calculators make may include:

• Your birthday
• Other tax rates (federal, provincial)
• How the savings plan grows
• Inflation rates
• Other fees by your managing institution

When provided, it’s important to read out some of these assumptions to determine the things that you need to adjust after getting your calculator’s results.

Inaccurate inputs

RRSP calculators mainly rely on the data that you input. It cannot gather other data other than what you’ve provided aside from the assumptions it states.

As such, it’s important to input information that is updated, correct, and reflects your status to have a near accurate result.

Disregarding inflation

As mentioned above, inflation is merely assumed by RRSP calculators. Other calculators do not consider inflation in arriving at the data results you got.

Inflation is an important factor in computing how much you should make in contributions. Prices of commodities would have increased due to inflation by the time you retire.

If considered, it may push you to increase your contributions or move to an investment type that is more aggressive (although it comes with a higher risk).

Your investment earnings must be future-ready by making sure that your RRSP contributions are adjusted for inflation.

Not doing reassessments

When there are changes in your financial situation, it’s better to do reassessments by using the same RRSP calculator you’ve previously used.

Some of these changes may include:

• Increase in your annual income
• Additional management fees and charges
• Tax changes due to new laws
• Lifestyle changes
• Other income sources during retirement

What is RRSP?

RRSP is the Canadian government’s retirement savings plan, where both employed and self-employed individuals can contribute for retirement purposes.

How RRSP Works

You will have to open an RRSP account with a financial institution like a bank, a credit union, a trust, or an insurance company.

The account you open will be registered with the Canada Revenue Agency (CRA). Your financial institution will also provide you with different types of RRSP that you can use, such as:

• Regular or Individual: registered under your name as account holder and contributor, whose earnings will be solely under name.
• Spousal or Common-law Partner: registered under the name of your spouse or common-law partner (usually the one earning less) and where the other spouse or common-law partner is the contributor (usually the one earning more). The income earned will be equally divided between the spouses or common-law partners.
• Group: a collection of individual RRSPs where a number of employees build their own capital for retirement through salary deductions. The group or the employer must be registered as a Group RRSP Service provider.
• Self-directed: where you (or your agent or broker) manage your own investment portfolio by buying and selling different types of investments issued by several financial institutions.

Benefits of RRSP

RRSPs are highly beneficial if your employer does not have a workplace retirement pension plan. Aside from planning and saving for future expenses, another sought-after benefit of RRSPs is its tax advantages.

Tax-deductible

Your contributions to your RRSP account are tax-deductible. This means that the amount you contribute can be used to lower the income tax that you will be paying at the end of the tax year.

To claim your tax deduction on your RRSP contributions, indicate the contributed amounts on your income tax and benefit return. This must be supported by receipts when you pay these amounts.

This tax deductible is subject to the RRSP deduction limit, which can be found in your Form T1028 that the CRA sends. It can also be accessed through your CRA My Account.

Find out what expenses are tax deductible in Canada in this article.

Tax-deferred

By the time you retire, you may receive the income that your RRSP has earned over the years on a “tax-deferred” scheme.

Any income earned over the years is not taxed if your RRSP funds are not withdrawn or if they remain with your financial institution.

Although this may seem like a tax exemption, it really is just a deferment on taxes. Once you withdraw the funds or receive payments from your plan, you start paying taxes. These taxes will be withheld and paid by your financial institution.

Tax rates may depend on your location in Canada and the amount of your withdrawals:

• C$5,000 and below: 10% (5% in Québec)
• Above C$5,000 up to C$15,000: 20% (10% in Québec)
• Above $15,000: 30% (15% in Québec)

Transferring your RRSP funds is not considered a withdrawal; you are not taxed for this. 

Also, find out if your plan is a locked-in type – this will prohibit you from withdrawing your funds for a certain period.

Watch this video for a practical example of how RRSPs can be used to reduce your taxable income:

For a more detailed view on RRSPs, read our primer on RRSPs and what every Canadian should know.

Compound interest

Your savings or investments in your RRSP earn compound interest. This means that the interest earned will revolve back to the capital or principal amount, which will also earn interest over time.

In other words, the interest you earn will also earn interest. Thus, it’s important that your funds or savings stay in the RRSP so that it will exponentially grow over time.

How you earn compound interest will depend on your bank or managing institution. This can be daily, weekly, quarterly, or yearly.

Contributions and their Limits

It is highly advisable that you contribute to your RRSP at 10% of your annual gross income – at the minimum. This will all depend on your capacity to contribute and your retirement goals or plans.

There is a limit to the RRSP contributions that you can make per year. As of 2023, contributions are limited to 18% of the earned income you have reported for the previous tax year (year 2022).

Bookmark this page to access the RRSP calculator at any time. You can also read and bookmark our Retirement Solutions page for news and insights on RRSPs, RSPs, and other retirement tools.

Have you tried using an RRSP calculator before? Would you have any tips to share? Let us know in the comments: