Tag Archives: Retirement planning

Start Saving When You’re Young

Working full time in the “real” world when you’re young is exciting. In addition to contributing, learning, getting your life on track, etc. it’s awesome to finally have some real spending money that you can start establishing your life with. While after living more-or-less your entire life on limited funds / someone else’s (your parents) dollar, it is good to be able o support yourself and do some of the things you want with that money.

While it’s great to have freedom, and it’s definitely important to experience life, the unfortunate reality is that it is also a good time to be saving for your retirement. I don’t mean other long term goals like buying a house or whatever, but your retirement. The fact of the matter is, even if you can’t save much, even if it seems forever away, and even if it’s the most boring thing you can do with your money, it is hugely to your advantage.

You can find endless articles and worksheets that show you how compounding is your friend and it really is. I’m not going to go into it, because it has been thoroughly explored better than I would be able to explain.  Even Einstein thought the principle of compounding was the most powerful force in the Universe.

While the percentage you can earn on your money because of the extended timeline is awesome, there is a more important reason to start young is because you most likely have far fewer obligations. Don’t get stuck in the trap of assuming you will start saving when you’re older, when you are making more, when retirement is closer. All of those things will happen, but at that time your lifestyle will likely be growing along with your paycheque.

Bigger mortgages, families, more refined tastes, along will many other factors will eat into your budget, and if you haven’t established a good base of saving, then it’s unlikely you’ll make up ground. It’s even better to save while you’re younger, stop for a few years in your 30s and start up again then it is to wait until you’re in your 30s.

Don’t fall into the trap of worrying about it tomorrow or thinking you don’t make enough. Everything starts somewhere and you can’t keep pushing it until tomorrow forever. You don’t want to be in a bad situation before you start saving.

Another important side point is that when you’re young you also have time to take a few risks and make some mistakes with your money. You have your whole life to make up for it. It’s far better to take some calculated risks for higher rewards when you know you can recover, rather than making a gamble when you’re older because you think you have to in order to retire.

RRSPs Still Strong For Young People

This time of year there is a lot a talk about RRSPs. If your parents were anything like mine, they wanted you to contribute as much as possible in order to save for retirement. It was introduced while they were still children, or not even born yet, and they have been the beneficiary of an entire lifetime of being told how powerful it is for retirement planning.

Recently, though, especially since the introduction of the TFSA, there has been some backlash about the RRSP as an investment for young people. The general premise is that if you are in a lower tax bracket now than you will be when you retire, the much-acclaimed tax deferral is not worth it. This is because you will end up paying more in taxes when you withdraw the money than you deferred when you deposited it. Not only that, but you are paying taxes on the income you make on the investment.

The popularity of the TFSA for young people is because any interest / investment income earned is withdrawn tax-free. This is traded for the fact your TFSA funds are contributed with after-tax dollars (i.e. no deferral). It does make sense for people in a lower tax bracket, and is a powerful savings tool. However, I don’t think the RRSP should be getting hit as hard as it has been.

There are a few advantages to the RRSP that help people save. I have a few quick ones to go over, then a longer one. First the quick:

  •  For some (at times me included) it is a little too easy to withdraw from your TFSA. An RRSP has you paying taxes on what you take out, which makes you think it over a bit more than a TFSA withdrawl which can be withdrawn online.
  • RRSP automation (with is available for TFSA’s as well) is a way to save without thinking about it. You can learn to live with a little less.
  • There’s the whole downpayment on your first house thing (Home Buyers’ Plan), but I’m not sold on that one fully.
  • You don’t pay taxes on gains in the year you receive them. You can then pull it around and plan what you end up paying.

The big one for me, though, is the fact that you get the tax refund now! Getting money today, rather than waiting for some unspecified time in the future when you will be making more, is the equalizer in my mind. The only thing is that it depends on how you use that money.

If you are smart and use it to either pay down debt or save for retirement, it is no longer some straight line comparison of “I’m getting a x% benefit, but will be paying y% in the future.” The money you get back will be compounded, either as an investment or a reduction in interest payments. The really smart thing to do is use that return to invest in your RRSP, compounding the tax benefits you receive. The one thing that all financial planners seem to agree on is that when you’re young, compounding is your best friend.

Now, the final disclaimer is that I have no clue if RRSPs are 100% the best plan for you. It depends on so many variables, many of which have to do with personal habits and even more of them unknowns. I can’t see into the future, so make the decision for yourself, use a financial planner, a parent or friend. There are some online calculators that you may find helpful, just Google it.

End note: If you want to try playing the game of getting the most refund from your RRSP, rather than stockpiling cash for years (and having the constant temptation to spend it) you can always contribute to your RRSP, then defer the deduction. This way you are still saving for retirement, but trying to get the full benefit of the refund you receive.