Are You Too Young For an RRSP?

If you are in your 20s, saving for retirement is unlikely to top your list of priorities. A new survey suggests that it probably should. 70 per cent of people polled, thought they could only afford to retire if they started saving by age 25.

It definitely seems like a daunting task when coupled with high debt levels, costly tuition fees and starting position salaries, but that doesn’t mean it’s impossible.

When you’re young and just starting out on your own, it’s hard to prioritize everything. Deciding how to allocate your extra cash flow can seem like a no-brainer, FUN, FUN, FUN. Saving is something that only older people have to worry about. The problem is, one day you are going to be one of those older people.

Sadly, only 26 per cent of those surveyed, across various age groups, said they felt they had saved enough for retirement, a figure that dropped to 20 per cent among workers with a household income of less than $100,000. Those surveyed also said they only put nine per cent of their savings toward retirement, on average, with RRSPs as the primary vehicle.

You have a huge advantage when you’re young, in regards to building savings, because of the compounding effect over a long period of time.

So, when should you start contributing to an RRSP?

As soon as you can. There’s not necessarily an age; for most people it should be as soon as they enter the working world. Even if you can’t save a lot, over a long period of time a little can go a long way. A great strategy is to set up an automatic savings plan which deposits to your RRSP on a regular basis. Not only does this help put time on your side, but it builds a good habit of putting your savings first.

· If you started saving just $50 a month at age 25, when your reach 65 your RRSP would be worth $74,414 assuming a 5% rate of return. That assumes you never increase your savings and doesn’t take into consideration the tax benefits of an RRSP.

· Using the exact same example, if you were to wait until age 35 to start saving, your RRSP would only be worth $40,927. To get the same end result you would need to save $90.91 a month, nearly double.

Should you contribute to an RRSP if you have Debt?

RRSPs can help you to save while still paying down debt. For example:

· Imagine you are 25 years old and in a 35% tax bracket, you have $40,000 of debt at 8%. You plan on paying $8,000 a year on the debt and not saving until it’s paid off, figuring you can catch up once the debt is taken care of. Using that strategy it would take 77 months to pay off the debt (6 years 5 months). By age 65 using the same 5% as our previous example and saving the $8,000 a year after the debt is paid off you would have just under $657,000 in your RRSP. Not a terrible plan.

· An alternative however is to start saving in your RRSP now, and using the tax break to pay down the debt. This might seem counter-intuitive because it takes much longer to pay down your debt. However, using this strategy, when you turn 65 you still have no debt but your RRSP is worth a little over $991,000. That’s a pretty big difference for using the exact same money.

Is owning your own home a priority?

RRSPs allow people to save for retirement but can also help them achieve other life goals such as owning a home. First-time home buyers can take money out – effectively borrowing from themselves – without a tax penalty, if they need the money for a down payment.

If you are just starting in the job force, it would greatly benefit you to meet with a financial advisor to clarify your financial goals and the best strategies to get you there. Langlois Financial Services specializes in creating financial plans customized to the individual, whether you are just starting out or you are heading into retirement. Feel free to contact us at anytime to see how we can help you.