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Thursday, August 31st, 2023

For young people, debt might come before RRSPs – Ask a Vancouver Mortgage Broker

Resolving to “get healthy” is a decent plan. However, setting a goal of biking to work and cutting out your afternoon peppermint mocha and chocolate cookie is an even more effective plan.

Vancouver Mortgage BrokerHow to practice ‘sustainable spending’ in retirement so you don’t run out of money

Congrats! You’ve grown your nest egg to a size comfortable enough to retire, but now comes the next big challenge: How to spend your retirement savings so it doesn’t run out before you do.

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Goals need to be specific and measurable to help you succeed.

This is why telling twenty-somethings simply to save for retirement can be futile. Retirement. It’s this big, amorphous, far away thing and Millennials have so many other competing priorities (debt repayment, saving for a home) and pressing challenges (low pay, tough job market). Sixty-one percent of working Millennials have no idea of the costs needed for retirement, an ING Direct survey reported.

What does retirement even look like and how much do I need to put away now?

Some experts say that if you start in your early twenties, you only have to put away three to five percent of your income. Wait until you’re in your forties and you’ll have to sock away 15% to 20%. Meanwhile others say that these numbers are useless because the figures differ depending on the person.

“It’s not about the number. You can use a rule of thumb to take a guess but the further you are away from retirement, the further your estimate is going to be from reality,” says Investor Education Fund’s Perry Quinton. “Save as much as you can and you’ll be able to open up enough opportunities.”

Everyone agrees that the earlier you start, the better off you will be and the less you will need to scramble when you are older.

Investor Education Fund uses the example of two sisters. One starts putting $1,000 a year into her RRSP from age 20 to 34, for a total of $15,000. The second starts saving at 30-years-old. She puts $1,000 every year into her RRSP until she’s 64, for a total of $35,000.


If both sisters made 6% annually on their investments, the first sister would have $141,700 and the second would have $118,100 due to the “magic of compounding interest.”

Most Millennials know they need to get on it. They’re realistic and they know what is coming.

Working adults between the ages of 20 and 29 expect to be worse off financially in retirement than their parents (59%), according to a study by Aegon. Thirty-seven percent believe they’ll likely fall short of their retirement needs.

“It scares me to death as I am not prepared for it at all,” says 28-year-old Christian Llano who works at Much MTV. “This is a time when I’m just starting my career. I don’t really have the money to put aside…which is true and not true because I still shop and travel.”

But he recently visited Columbia to celebrate his grandmother’s birthday and had an epiphany. “I thought, ‘Oh my God, she reached 90. She received so much love,’” he says of his grandmother who had nine children. “I thought, ‘Wow, I’m not going to have kids. Who’s going to take care of me?’”

Formal benefit pension plans are on the out. Debt levels are increasing. Today, 59% of retired Canadians say they hold debt, a CIBC survey says; more people are delaying retirement or retiring with mortgages.

Save as much as you can and you’ll be able to open up enough opportunities

For young adults, some advisers tout the importance of tackling debt more aggressively than stockpiling for retirement.

“Given the economy right now, most people are not making as much in their investments as they’re paying on their credit cards or their mortgages. Let’s pay off your debt and get out of the cycle,” says Monika Chestnut, a financial adviser based in London, Ont. “Once you’re debt-free, all that money you were paying to the debt, you can start socking away into your retirement fund.”


Jason Heath, a fee-only certified financial planner, says young people can actually have too much saved in their retirement funds.

“You probably don’t want to end up with more than $25,000 in your RRSP in your twenties,” he says. “Once you get close to that point, you should probably be building money up in your TFSA and making sure you’ve paid off all of your debts.

“There are way too many young people who have money in their RRSP but have a student loan, have a credit card, have a line of credit and they haven’t even gotten to the expensive family events like marriages, homes, minivans and maternity leaves. I find that’s often where people get off track. They’ve maxed out their RRSP and they’ve got nothing else and they’ve started to take on consumer debt.”

Let’s say you have no debts and you have savings in order. Where should a young person start when calculating a potential nest egg?

Start by thinking about your future needs and wants, says Chris Buttigieg, a senior manager in BMO’s wealth planning strategy department.

Imagine your future retired self. You’re ageless like Tom Selleck or Cher. You play golf and sojourn in Europe or you’ve gone back to school. You have a car to pay for and you’re not downgrading your home. You think you’ll need $36,000 a year or $3,000 a month after tax (in today’s dollars and adjusted for inflation which you assume is 3%) to live happily until the age of 90.

Let’s assume that you don’t have an employer pension; but you have the Canada Pension Plan and Old Age Security, which might make up a third of what you need.

How much will you have to start saving yourself to have this lifestyle?

Well, if you start when you’re 20, you’ll need to put away $600 a month in an RRSP and/or TFSA (indexed by 3% annually — so $600 in the first year, $618 in the next and so on) until you are 65, says Mr. Buttigieg.

We are assuming that you will earn an average rate of return over the years of 6%.

If you start when you’re 30, you’ll need to put away $1,000 a month to have $36,000 a year to live on.

This must be why people don’t give you numbers. They’re terrifying. (“I need to save how much? And put money away for a wedding, a home, pay off debts, etc.)

“[Clients] are shocked at how much they have to start saving and then they’re scared,” Ms. Chestnut says. The majority of her clients are Millennials.

“If you scare them, they’ll put the blinders on and they’re done. You have to have a plan: how are we going to get through this? Are there opportunities for you to make additional income? If you can’t make extra income, what bills can we look at cutting or what spending habits can we look at changing?

The numbers above — $600 or $1,000 a month — are based on a linear projection. And life is not linear. It’s a scribbly doodle.

“A lot of people get their mortgages paid off when they’re 50, 55 or 60 and all of that money they were putting to their mortgage, they’re suddenly able to save,” Mr. Heath says. “There are costs that disappear over time…Maybe it’s tight because they’re paying childcare expenses for their kid or a student loan that’s almost done. Or maybe it’s an inheritance or maybe it’s a down-size.

“You need to look at the big picture.”

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