Sunday, February 23

Are Millennials Being Talked Out Of Saving?

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“It seems that an RRSP is basically the worst investment vehicle you can put your money into.”

Those were my friend’s words as we were discussing the upcoming RRSP contribution deadline for 2014 (it’s today, by the way). Why such pessimism? Because the RRSP is getting put through the ringer lately, being pegged as a last resort only if you have nowhere else to stash your cash.

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Personally, I love the RRSP as a savings vehicle. I always have. I’ve been nursing mine with monthly contributions since my 25th birthday (I’m now 29): I even blogged about it right here. I’ve frequently said the magic number to get into your retirement accounts by age 30 is $25,000. It hasn’t always been met with a positive response, but I stand by it.

If you manage to put $25,000 into your retirement accounts by age 30,

you only have to save $200/mo and earn 9% (below the historical average for the stock market) from then on to retire at 65 as a millionaire.

In other words, clear that $25,000 hurdle and you’re off the hook for painful scrimping and saving in your 30’s, 40’s and beyond.

So why are so many young people, like my friend, NOT saving for retirement now?

We’ve scared them out of it!

The RRSP vs. TFSA debate has taken polarizing sides, and young people that aren’t familiar with the nuances of each vehicle are heeding bad advice. As a result, millennials are not saving at all, not saving enough, or saving in the wrong places.

RELATED: Should You Contribute To An RRSP or TFSA?

I don’t blame them. If you’re new to personal finance, the rules, acronyms, and choices are overwhelming. Couple that with strong debates on what’s the best option, and you end up with millions of confused young Canadians saving next to nothing.

I understand all the reasons not to opt for an RRSP in your twenties: your income is low so you don’t need the tax break, you can’t predict what your income will be in retirement so you don’t know if you’re paying higher taxes now or later, the TFSA is the magical unicorn savings account, and so on. But people don’t hear “this is how you determine the best tax-advantaged account for you right now” they just hear “RRSPs are bad”. And so they don’t put any money in them.

We need to change our message. And the first part should be, “the TFSA is not enough”. 

The TFSA is an invaluable savings tool, but it isn’t without flaws. Because people can withdraw contributions without penalty, no one using the TFSA at it’s real capacity. On average, Canadians have only $17,450 in their TFSAs — about half of the actual contribution limit. TFSAs haven’t really been sold as a retirement savings tool. We’ve been telling people to save up for everything from vacations to weddings in their TFSAs. I only recently changed my tune as early as 3 months ago, finally admitting that your TFSA is for saving for retirement. Prior to that I stupidly kept all my planned spending in my TFSA and smugly patted myself on the head for being such a great saver. It wasn’t until those articles came out about people getting to six-figures in their TFSAs that I realized my revolving-door contributions and withdrawals had totally screwed me out of a huge earning opportunity. I’m in a hurry to mend my ways, but I can never get back the earning potential I’ve missed out on.

The RRSP is inherently more complex than the TFSA, but it still provides a smart savings space for Canadians. If you’re young and have money to spare after maxing out your TFSA, the RRSP is your next best bet. If you don’t need the tax break and think you’ll be earning more later, simply make your contributions now and claim them in future years when your income is higher. The RRSP has a tax-penalty that’s painful enough to deter early withdrawals. Consequently, the money is often left to grow unhindered by the temptations of now. It will bump along, attacked by market downturns and facing erosion by inflation, but will ultimately emerge in a tidy sum at the end that will spare you eating cat-food and living in a cardboard box.

If someone begins saving $5,000 per year at age 25, by retirement they’ll come out $200,000 ahead of someone who starts at age 30, assuming a modest 5% return. This means their 5-year head start only cost them $25,000 out of pocket, but produced an extra $175,000 in retirement income.

Let’s start communicating to 20-somethings that it is better to pay income taxes on an extra $175,000 in retirement, than to pay no income taxes on $0. 

Right now, young people are running from the RRSP and half-assing their TFSAs. They’re reluctant savers because saving is painful and annoying and there are too many options. It is easier just to “do it later”, when it matters more but the best opportunities have passed. By pushing the TFSA vs. RRSP debate, all we’re doing is creating an either-or equation in people’s minds, and they’re picking sides. Imagine if we instead told them to save in both accounts and outside of them.

We’re doing a disservice to millennials by pretending the saving and investing conversation is a complicated one. The message is simply, “save now, have more later”.

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About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary. CEO x 2 and MOM x 1. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

22 Comments

  1. This times 1,000.
    I just opened an RRSP for the first time (and I was 26 when I did). I was told over and over by folks at my credit union and bank that TFSA was the way to go. I’m so happy I didn’t listen to them and I’ve started socking away a little but of $$ each month into my RRSP and my TFSA. It isn’t a lot by any means, but I’m ramping up the savings as I pay down debt too. I do admit that I like the TFSA for flexibility over the RRSP, but I also appreciate that we can claim monies paid into an RRSP come tax time.

  2. Haha, I love that you brought up the ’25k by 30′ thing again, and although I won’t quite be there yet (slow starter and all), I’ll have my net worth at 25k in my 30th year!

    But yes, it’s also a great vehicle for savings if you have trouble saving because it’s basically locked the hell away!

  3. I’m lucky to have grown up in a home that if you want something, you save for it (including retirement). I’ve been stashing away any spare money in a TFSA and will start contributing to an RRSP once my student line of credit is paid off in about a year.

    For me, the $25,000 in 5 years is manageable, even on an entry level salary.

  4. Aleksandra Sagan on

    When I first read your $25K by 30 number I was, well, outraged might be the appropriate word. Thinking about my student debt (just more than $28K) and how long it would take my to pay it off (when I graduated in 2012, my goal was to pay it off in three years).

    However, I am not well on my way to having the $25K by 30. I managed to pay off my student debt in less than two years after graduation. While I was doing that, I was making teeny-tiny RRSP payments every two weeks. Now that the student debt is paid off, I’m aggressively making RRSP payments – $360 every two weeks. I currently have just under $10K, and plan to have $21K by Jan. 1st 2016 (I’ll be 29 then, and will have another nine months until my 30th birthday).

    All that to say, I now understand that it can be done, you just have to be smart with your money, and a lot of student debt doesn’t have to stop someone from achieving that goal.

    #RantOver

    • hahaha you’re not the only one to be outraged at the figure! I got plenty of emails.

      I think what young people don’t realize right away is that to get to $25,000 by age 30, you don’t actually have to save $25,000. In 5 or 6 or 8 years (depending on when you start saving), interest, dividends and capital gains will likely give your savings a not-insignificant boost. $5000/yr for 5 years works out to less than $500/mo. It’s not easy, but totally doable.

  5. I have to say, when I started reading about finances, I was totally confused by the TFSA and the RRSP, but after reading a bunch of stuff and looking at what I have, and talking to my adviser, I am trying to do both.
    On a side note… with this $25,000 by 30 number… I’m already a little over 30, but I am over $25,000 in my RRSP, so this sort of made me feel a bit less behind than I thought I was. So, thanks! 🙂

  6. 9% might be below the average S&P but I prefer to do my calculations at 6-7% to force me to save more. I’m in my early 30’s and I find most people aren’t saving because they prefer to spend. They just get the whole concept of compound interest.

    • haha I agree. I typically do my calculations at 5% but I was trying to be motivating in this post 😉 people can get intimidated if you tell them they need to save $500+ /mo forever.

      Agreed they prefer to spend, but that’s also because that’s exactly what the gov is trying to get them to do with low interest rates. Not a lot of incentive to save.

  7. In the States we don’t have anything like the TFSA you mention – all of the accounts have tax penalties like the RRSP if you withdraw early, at least the interest and gains. Unfortunately many people don’t save anything elsewhere, and they mainly save in the retirement account only because they get a company match for doing so. Otherwise many people wouldn’t save anything.

    They then decide to cash in their retirement account, despite losing half of the money to taxes and penalties, to pay off credit card debt in their forties. Money Magazine is also full of people in their 50’s starting businesses who cash out their retirement accounts to do so, again because they don’t have any cash elsewhere. Drives me nuts because I see the millions of dollars they are throwing away at retirement. I think you should have to calculate your retirement balance at 65 using an 8% number for the money you are taking out before you are allowed to cash out of one of these accounts. People might think twice, but probably not.

  8. 25k by 30 is one of my favourite posts on here. Even when I read it, I didn’t think It was impossible. I think the majority of people could attain that through determination and sacrifice (sorry if your circumstances prevent you).
    My friends haven’t really started saving for retirement either. Actually, they only seem to save for the two Ts – travel and technology..

    • haha that makes me so happy to hear! So many people considered the 25K by 30 harsh but if you just do it, EVERYTHING IS BETTER. Even if you only get to $20,000 or $15,000 you’re better off. Pain now, payoff later.

  9. The US Millennials are considered so deep in debt, this conversation isn’t happening down here. I looked yesterday to see if I missed the fight, but I couldn’t find anything. The only thing I’ve seen that even touches on this issue is “the right order” for maxing stuff out, e.g. 401k/RRSP to the match, then Roth/TFSA until its full, then back to 401k.

    Even pushing the “right order” is dumb because I doubt many people are doing any of that. But I guess a road map is better than no map at all.

    • Ack that’s terrifying.. I think young people are saddled by debt here as well, though not as much in the US.

      I think a lot of millennials can’t hit the right balance with saving and paying off debt either. They tend to do just one, and they often do it poorly.

      • I think we’re all just planning to move up north and take advantage of the free healthcare and services at retirement time 🙂

  10. I have nothing more to add except that you should sock away as much as you can in your RRSP to get any full 100% employer match, and then work on maxing out both RRSP & TFSAs until you have excess cash sitting in some margin account.

    I started saving for retirement even while in debt, after I graduated from school because a 100% employer match = 100% free money.

    Then the rest is history.

    • Amen to that. The only reason I have any substantial net worth at all is because of the RRSP… and because I made the decision not to borrow from it for my MBA 😉 Raiding kills bank accounts.

  11. Only 9%??! That’s a super aggressive number to be banking on (literally). Assuming 95% of savers will choose actively managed and over advertised mutual funds, factor in management fees, and you have to beat the market for 40 years!

    Still a great message though, it’s super important to have short term goals and understand the tools available.

    Thanks for the share

    • Historically the stock market will give you a steady 10-12% so 9% is reasonable. Hopefully anyone wise enough to bank $25K by age 30 will also be wise enough not to choose mutual funds 😉

  12. A smart thing to do if you have the discipline to not spend your TFSA is to make contributions to your TFSA when you are your younger and income isn’t as high. That way any capital gains, interest and divedends are tax free versus the RSP where you pay taxes when you do a withdrawal. Then once your income is higher you can make an in-kind contribution from your TFSA to your RSP and get a sizeable deduction.

    • Agreed!

      And if you max out your TFSA, you can start making contributions to your RRSP and just claim them later, so that gives your money extra years to grow =)