Fellow thirty-somethings, how much are you contributing this year?
Over the next few weeks I expect to see more banking polls and a deluge of RRSP articles to entice you to contribute to your Registered Retirement Savings Plan. I’ve read only 4 in 10 adults under 35 have an RRSP. More Canadians under age 35 are focused on raising families, paying the mortgage and trying to live life, as well they should. Life is after all for the living. Raising a young family, establishing your career and doing more, the data supports common thinking, the majority of thirty-somethings simply don’t have the financial means to always plan for tomorrow.
“Save now, save early!” banks shout or you can wave your financially secure golden years goodbye. Without RRSPs financial institutions warn, you’ll be relegated to a retirement filled with debt and poverty instead of strolling along pristine white sand in the Carribean.
I’ve often wondered if this is fear mongering or truth? Maybe a bit of both?
We’ve all been told to pay ourselves first but the majority of us can’t find the energy or the funds to consistently do it. I would argue the average thirty-something has at minimum the following on their minds (over retirement) in no particular order:
• Keeping a roof over their head (mortgage payment)
• Paying for life’s essentials (heat, hydro, water, food)We’ve all been told to pay ourselves first but the majority of us can’t find the energy or the funds to consistently do it. I would argue the average thirty-something has at minimum the following on their minds (over retirement) in no particular order:
• Keeping a roof over their head (mortgage payment)
• Having a means to get around places (car payment(s))
• Paying for the “what ifs” in life (insurance)
• Paying off expenses (credit card bills)
• Saving for the kids (RESP(s))
• Paying off the vacation (if you can afford to take a vacation in the first place)
Kinda hard to see where retirement fits in eh?
I haven’t even mentioned things like establishing an emergency fund. What about paying for simple freedoms and entertainment in life? Gents, you’ll note there is nothing above about a casual game of golf or watching the Sens play live once a year. (As a Senators fan, the latter is highly debatable to be called entertainment this year mind you). Ladies, there is no mention of a day at the spa or even a trip to the salon with girlfriends.
Managing household affairs and staying above the inflationary waterline seems to be where my friends and peers focus their energies most of the time. I don’t think our generation is any different than the ones before in this regard. So, given these priorities in my age group, I ask you the following:
• Do you think thirty-somethings should be saving more for retirement and if so, what would you recommend they do amongst everything else going on in their lives?
• Do you think thirty-somethings are getting too many mixed messages from the financial industry?
• As a thirty-something do you think you can retire without contributing to RRSPs and if so, how?
• If you are contributing to RRSPs this year how much are you contributing?
I should mention that government pension income in the forms of Canada Pension Plan (CPP) and Old Age Security (OAS) should guarantee retired couples about $30,000 per year indexed to inflation during their golden years. That’s just under $600 per week per couple of pre-tax income. Not that much.
I read an article in the Globe and Mail recently that included fellow blogger Echo (Robb Engen) where contributor Malcolm Hamilton, an actuary at Mercer Human Resource Consulting and an expert on Canadian retirement saving said “people shouldn’t get unduly discouraged, the worst thing people can do is allow conflicting financial advice to paralyze them with fear.”
Is it that easy Malcolm? I bet you’re over age 55.
My Own Advisor
12 comments:
Hello!
Interesting post, especially for me, I am exactly 30 years old.
My parents are not into stocks or mutual funds but they has some RRSP. Since I begin to work, from what my parents teach me, is to contribute to a RRSP in order to save on taxes. That was basically it... But it was a good start. Even today, I always contribute to the max of my eligibility. It's save me a lot in taxes, but its also good for retirement. So when it come to RRSP, I decide to contribute to the max every single years.
To answer to one question, I think I could make a living on 15 000$ per year when being a senior. Seriously, I am aspiring to live on 15 000$ in dividend income per year. I am now at 8k. So yes, I could make it to retirement without RRSP contribution. But I like to mix, so RRSP, TFSA everything else that I can use, is a big YES for me. Except for this year TFSA where I didn't invest in but that's something else.
The financial industry, especially the one deliver by BMO Bank of Montreal is all mess up. As an investor, I made myself my own idea of things. The best bank ever for people of my age is TD Canada Trust. I got everything needed to start a healthy financial life. I start at 25 with them and now, I have a portfolio of close to 150k, earn a total of more than 8k in dividend income and thanks to TD, I hold a total of 64k in debt. It's a thank to TD because I was able to use all credit I got with them for leverage and it all went extremely well. And TD Waterhouse had been always of a good help, answering my questions...
Overall for me, its been a mix of luck, of being able to save save save without any trouble (I am from New Brunswick :)), help of TD Canada Trust and TD Waterhouse and the reading of Derek Foster books at a time where I needed the most.
RRSP is needed for a good financial health even while aspiring to a stop working life because who knows what life can bring at a later date.
35 yrs old, Mrs SPF is 25.
• Do you think thirty-somethings should be saving more for retirement and if so, what would you recommend they do amongst everything else going on in their lives?
A: Depends. Priorities really. If the 30 something has taken on too much mortgage they should likely be looking at paying as much off as they can for guaranteed rate of return - before rates go up too high. If they have kids? Lots of expenses there. Fundamentally however, yes they should be saving to take advantage of compounding.
• Do you think thirty-somethings are getting too many mixed messages from the financial industry?
A) Nope. They aren't "getting" the message much from what I read. They may hear it but they aren't listening.
• As a thirty-something do you think you can retire without contributing to RRSPs and if so, how?
A: I think I can. We both have government pensions to look forward to. Couple that w/ 35 yrs of TFSA maxing for Mrs SPF and 25 years of TFSA maxing for myself - that will add up. Also, we may look into rental income instead of RRSPs due to the fact our retirement income will be high and we'll get dinged on RRSP withdrawals.
• If you are contributing to RRSPs this year how much are you contributing?
A - The minimum I need to in order to repay the home buyers plan I took money from for my first house purchase 5 yrs ago.
Unfortunately, I'm too old to answer your questions. :(
However, I will say that most people should concentrate on improving their financial position.
That could involve RRSP contributions, paying down debt, cutting costs, increasing income, improving their job prospects etc.
You can't just compare one metric (RRSP contributions).
Thanks for the mention! I guess if you read that G&M article you'll know that I don't plan on making any RRSP contributions this year...but that doesn't mean I'm not prioritizing my retirement.
I agree with Mike, whether it's RRSP, TFSA, pension, or extra payments on your mortgage, as long as you are improving your finances each year you'll be on the right path.
30-somethings have more options now than our parents did at our age, but I don't believe that we are getting mixed messages, we simply have more choices. So yes, you may see declining RRSP contributions in our age group, but I don't necessarily think that will translate into problems in retirement.
It's never to early to start and in this age of low interest rates it gives you move flexibility to invest than in the past when you had to be concerned about higher and possibly growing interest rates. Like MH, I'm also too old to answer you questions, but I'll offer some insight and hopefully some inspiration to help you along.
I've been keeping net worth statements for 20 years (coincidentally, the year I turned 30 and we upgraded to a larger house), so my spreadsheet has an interesting perspective to offer. That year I show that my wife and I had ~$2K in RRSPs and about $10K in total savings; offset by a mortgage of $200K at an 11% interest rate (yes, some things are easier today!). Not counting the value of our home, our net worth was -$200K. So deep in debt, though with a roof over our heads. 10 years later as I was exiting my 30s, we managed to build the RRSPs up to ~$235K and net worth (again not counting our home and a cottage acquired along the way) to +$200K. By saving early during our 30s, we've set ourselves up to eliminate debt and build our net worth during our 40s so that we can now seriously look at retiring.
Despite two economic downturns which impacted our investments (we took a $100K haircut when the .com bubble burst in 2001-02 and nearly $200K during 2008), we've managed to add >$1M to our net worth during my 40s. We couldn't have done that if we hadn't managed to build our investments to >$300K during our 30s. Without that foundation of reducing debt and and building savings time isn't on your side. And counting on CPP means you have to work until you're at least 60. If you want a long retirement starting in your 50s or earlier it has to be on your dime and the sooner you invest that dime, the better.
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I'm 23, but I'd thought I'd answer anyway.
"• Do you think thirty-somethings should be saving more for retirement..."
A) Yes. Some should brown bag their lunches more often. They can also settle for used or store brand items more often when they shop. They should also check out free local seminars put out by banks and other financial groups.
"• Do you think thirty-somethings are getting too many mixed messages"
Yes. Financial institutions will try to take advantage of 30-somethings who are confused and want financial guidance. It's up to consumers to filter through the noise and decide what's best for them. That means doing their own research.
"• As a thirty-something do you think you can retire without contributing to RRSPs."
Yes, most of my retirement income will come from dividends from a non-reg portfolio, plus some rental income from real estate. Estimated retirement net income in today's dollars, $60K/yr. Estimated time of retirement: 2038.
"• If you are contributing to RRSPs this year how much are you contributing? "
About $7K. Plus $2K employer match at work. I contribute to RRSP every year to minimize my future tax risk, but I don't max out my contribution room.
Kevin
No RRSP for this guy. TFSA and Non-Reg Dividend portfolio only. I envision paying crazy taxes in my 70s if I went the RRSP route.
@Sunny - thanks for stopping by again! My parents are strictly into funds, but at least some good ones! I don't believe maxing my RRSP is the right move for me; some contributions yes, but maxing out, no. Reason being, in my (planned retirement) situation, I'm going to have enough taxes to be paid on my pension, I don't want to take yet another big hit with the RRSP. Personally, I don't think I could live off $15,000 or even $30,000 per year in retirement. I know my house will be paid off by then, but that's only $600 per week. If I can do something now to augment my $30 K/year, I'm going to do it. I just don't want to get hammered with taxes in retirement. I worked all the my life to pay taxes, that's enough. That's why dividend-payers unregistered and in TFSA long-term are gonna work better for me more than RRSP. I tend to optimize my RRSP for that reason. As they say, time will tell all!
@Sustainable PF - thanks for commenting!
True, depends. A huge mortgage that's over 50% of your income, no RRSP, just pay down debt. However, every little bit counts (in an RRSP) to take advantage of compounding; even $50/month will help you long-term.
I laughed at your comment, you're probably right "They aren't "getting" the message much from what I read."
If you guys both have gov't defined benefit pensions, for the next 25+ years, you're set man. I wouldn't worry about RRSPs either, just that wicked TFSA! My wife and I aren't so lucky with gold-plated pensions, but good on you to have them. Well done.
@Mike - you're funny. Thanks for stopping by! Ok, how about soon-to-be fellow 40-somethings out there? :) You're right, I only focused on RRSPs but that's just one piece of the financial pie.
My wife and I like to do a bit of everything; some RRSPs, max. TFSA if we can, dividend-payers for passive income and mortgage paydowns. This approach seems to be working for us but probably could be accelerated if we only focused on one or two things. In an ever-changing financial world, I'm just not comfortable in focusing on only one or two things.
I'd/we'd rather improve our overall financial position in all areas, slow sometimes as that feel.
@Echo - you're most welcome man. Mike has some excellent points, I guess it really is all about continuous improvement; continual financial health.
No mixed messages? Really? One article says do this, another do that. Examples of this occur every week. Taking a step outside of what I already know (and also still need to learn (lots)), I don't think many 30-thirtysomethings have a financial plan, a will, emergency fund, know what their expenses are month-to-month, etc. It's not like they teach you all this in school :)
More choices = more complexity IMO if you don't take time to learn and educate yourself. It's a complex world out there and given the priorities of some young families, I don't blame them putting off RRSP contributions or never starting them.