How millennials can get ahead and retire smarter
Retirement planning made easy for millennials.
When it comes to retirement savings, there’s one advantage millennials do have: time. And it’s what you make of that time that really counts.
If you’re in your 20s or 30s you may feel behind the curve when comparing your finances to those of your parents at the same age. Millennials, born between 1981 and 1996 came into financial adulthood just as we experienced the stock market crash of 2000 and the 2008 financial crisis. So for those of you understandably apprehensive about investing, building a retirement nest egg can feel at best premature and at worst, a pipe dream.
Here are the three key things you need to consider to ensure you utilize your biggest asset and maximize every dollar saved: invest early, implement retirement savings tools, and focus on the long game.
Start now even if you think you can’t save very much
If you’re like many in your age-group, you’ve been thinking you don’t have enough to put aside for retirement right now; especially when you may be paying off student loans, saving for a mortgage or starting a family. But the sooner you begin saving regularly, the less you’ll need to invest later to achieve your retirement goal.
If you wait, you’ll need to save far more to achieve the same amount due to the power of compounding interest. For example, saving $6,000 a year at 5% compound return for 10 years from when you’re 35-45 compares to starting later at age 45 and saving twice as long, to age 65. Even though you’re saving for half the time, the early saver ends up ahead by over $46K. If you take away nothing else, remember that a little can go a long way the sooner you start saving.
Your retirement savings tools: RRSPs, TFSAs, Non-registered investments
So now that you’re inspired to start saving for retirement, what’s your next step? You have two basic types of savings tools: registered, which are structured government programs that provide specific incentives and restrictions; and non-registered, which are investments that are completely under your control but don’t offer the same tax advantages. In both types, your investment options run the gamut from simple savings accounts to term deposits to market-based investments.
1. Registered Savings
Canadians are very lucky to have two powerful tax-advantaged programs available for long-term savings. The key difference between the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) is that contributions to the TFSA are with after-tax dollars and RRSP are with pre-tax dollars. Both have their place in your savings plan.
TFSA: Because you’ve already paid tax on the money you put into a TFSA, there’s no tax deduction when you come to file your taxes each year. However, the interest or dividends you earn grow tax-sheltered, and you aren’t taxed on withdrawal. TFSAs can be very useful now when you’re saving for perhaps a down payment and will want to withdraw money before retirement. They are also great to use when you’ve maxed out your RRSP contributions.
How much you can contribute into an RRSP is tied to your income. Not so with a TFSA. The amount is set annually and increases periodically. For 2019, the maximum contribution is $6,000. You can start as soon as you turn 19, so if you have never contributed (and factoring in the maximum contribution amount for each year) you could contribute up $63,500 in 2019.
RRSPs: RRSPs are considered to be the foundation for building your retirement. Your contribution amounts (within set limits according to your income) are tax-deductible and your gains are tax-sheltered. When you retire, the income you draw is taxable, but typically at a lower rate than when you were working. Like the TFSA, an RRSP can hold a variety of types of savings accounts and investments.
Like many things, the biggest hurdle with either plan is getting started. But even $50/month will put $600 annually in your TFSA or RRSP. Here are some tips to get you going.
Set up an automatic deduction: One of the easiest and most effective things you can do is set up a pre-authorized monthly contribution. That way your savings will grow effortlessly.
Contribute the maximum: If at all possible, try and contribute up to your limit for your RRSP to get your maximum tax refund. If you get raise or bonus, consider contributing the extra, perhaps this time towards your TFSA.
Take full advantage of your employer’s group RRSP: If you belong to an employer-sponsored retirement plan that matches your contributions (usually to a certain limit), try and put in enough to generate the maximum matching contribution. It’s like getting an instant bonus.
2. Non-registered savings
Non-registered savings or investments are made using after-tax dollars and don’t come with the tax advantages offered by the registered plans. The interest or dividends you earn in a non-registered portfolio form part of your taxable income. Where possible, shelter all you can in your RRSP or TFSA as you build your retirement savings to minimize the tax bite.
You’re in it for the long haul
Many millennials have a different view of retirement than their parents and grandparents. You’re not ones for putting in time over many decades for a pension and the proverbial gold watch. This generation leans toward a multifarious career of meaning and fulfillment, in which your desire to work may be much longer. This can only benefit you as you learn more about investing and build a retirement portfolio that reflects your investment personality, your current circumstances and your goals.
One of the most beneficial steps you can take, even early on in your financial journey is to establish a long-term relationship with a trusted professional financial advisor. A certified advisor can help guide you with the strategies to build a strong retirement plan that balances all your investment options.
Now is the time to start planning. The more you do now, however seemingly small, the greater the impact and the more choices you’ll have later.