Retirement series: Why teenagers and young adults should think about retirement

Young people have a lot to think about – studying hard, chatting on their phones with friends, getting a part-time job, figuring out post-secondary education. But retirement?

Young people have a lot to think about – studying hard, chatting on their phones with friends, getting a part-time job, figuring out post-secondary education.  But retirement?  Why should young people think about retirement?

Many of us have heard the tale of two savers – one person saves the same amount every year while the other starts saving later in life but saves a higher amount each year.  And who is the winner?  Let’s a take a quick look at the numbers from an example from the Globe and Mail:

  • One begins investing $100 a month between the ages of 15 and 60. The second invests $500 per month between ages 35 and 60. They each earn a 9-per-cent return.
  • The first person socks away $54,000 over 45 years; the second saves $150,000. But the person saving less ends up wealthier. The one saving just $54,000 over a lifetime earns $687,823. The one saving $150,000 ends up with $553,943.  

In other words, the power of compound interest!  By starting earlier, people can actually accumulate more wealth while saving less in actual dollars.  

I also encourage young people to start filing tax returns once they have a part-time job.  Even though there isn’t a requirement to file returns until you actually owe taxes, filing returns allows you to accumulate Registered Retirement Savings Plan (RRSP) contribution room, which is based on employment income.  While young people may, for a number of reasons, wish to defer their saving, they can make use of that RRSP contribution room at a later time since it can be accumulated indefinitely.  The amounts may be small but they will build up and can be used when the individual is in a higher tax bracket.  

And for those who do want to save now, they can make their RRSP contribution now but defer taking the RRSP deduction until a later year, hoping to get a larger tax benefit when the individual’s income is hopefully higher.  
Save less now, get wealthier and receive a larger tax refund later.  That’s a win, win and win strategy!

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