I’ve got bills, bills, bills. Why should I start thinking about retirement at 25?
In a recent, completely unscientific Facebook poll, I asked my friends whether they had begun planning for retirement—or given it any thought at all. The answers ranged from “Are you crazy?” to “I have because the lady at the bank told me to” to “I haven’t started planning for retirement because I haven’t started planning for my career.”
Herein lies the twenty-something money conundrum: When we’re already balancing the finance-draining trifecta of tenuous employment, debt, and the trappings of youthful self-indulgence, how can we possibly think about building a financially secure existence for our sexagenarian selves?
The path from here to retirement is laden with seductive short-term opportunities to drink with friends or buy trendy neon shirt-dresses, but a bullshit-free solution exists. Ask yourself: “At what age do I see myself retiring?” Start thinking about the life the 65-year-old you might want to lead, and then make a plan to get there. No excuses.
Krystal Yee, who writes the “20-Something & Change” column for Moneyville.ca and a blog called Give Me Back My Five Bucks, is living proof that us young’ns are capable of thinking ahead. After graduating from university in 2006, Yee found herself $20,000 in debt thanks to a Molotov cocktail of student loans, a maxed-out line of credit and Visa, and…this all sounds pretty familiar, right? “There was so much I wanted to do with my life, and I knew the sooner I got myself out of debt, the sooner I could start living the life I wanted,” she says. At just 24, Yee began aggressively paying off her consumer debt, cultivating a more frugal lifestyle, and siphoning 10 to 15 per cent of her earnings into a TFSA (tax-free savings account) and an RRSP—a savings system that has placed her firmly in the black, with a solid head start on her nest-egg, at the ripe old age of 29. “I’d rather work hard now while I’m young and energetic, than 50 years from now, when I don’t want to have to worry about money,” she says.
Yee’s situation might seem equal parts idyllic and unattainable to most of us, but, believe it or not, retirement is quickly becoming a Gen-Y priority: An RBC report released earlier this year found that 43 per cent of Canadians aged 18 to 34 now hold RRSPs, a sizeable jump from 39 per cent in 2011, which was the lowest rate in the past 10 years.
Despite this upward trend, most young professionals still aren’t taking the time to meet with a financial planner, says Marlena Pospiech, senior manager of retirement-planning strategy at BMO’s Toronto headquarters. “To save for retirement one needs to be motivated and to see it as something really relevant today,” she says. “When a young person can see the math and how much better off they will be by investing these small amounts now, they’ll probably be shocked.”
A good start, says Pospiech, is to really think about the lifestyle you’d like your wrinkly future-self to enjoy. Do you envision spending your twilight years bungee jumping in Nepal, or kicking it old-school in a nursing home? What about home ownership? Kids? All of these variables will factor into how much you want to allocate for retirement savings. (Most people feel that they’ll need about 70-80 per cent of their pre-retirement annual income to maintain their desired standard of living.)
Pospiech then suggests you examine your current budget to see where some non-essential purchases can be re-directed into savings; maybe start brown-bagging your work lunches, or think about sharing rent with a roomie. Setting up automatic withdrawals from your savings account is another option, even as little as 5 per cent, which can be funneled into an RRSP or TFSA. You can bump up your contribution to 10 per cent as time goes on and, presumably, your income increases.
Once you’ve set aside the money, you’re going to need somewhere to put it. Whether you open an RRSP, a TFSA, or some combination thereof depends on your individual situation. A TFSA might be a better choice for those just starting out: You can contribute up to $5,000 annually, tax-free, and there is no penalty tied to withdrawals.
Whatever strategy you choose, Pospiech recommends chatting with a financial consultant, then reviewing your plan when your money situation changes—as it almost certainly will between the ages of 25 and 65. “Just get started and don’t worry about having an exact number.” Pospiech says. “A financial routine and disciplined habits will make all the difference.” God knows it’s easy enough to get bogged down by day-to-day transactions without considering “The Future,” but even if current economic conditions aren’t working in our favour, time is.