When it comes to preparing for retirement in Canada, there are various roadblocks to any age group - millennials included. From rising childcare and housing costs to lower earning power, it leaves you wondering how the younger generation is supposed to save.
Below we’re answering some important questions young adults may have about saving for retirement and what they do now to start saving.
Question #1: When Should I Plan on Retiring?
When you think about your retirement, what age do you envision? The standard was usually around 65, but those numbers could be changing. Between a longer life expectancy and the continued need for a stable income, Canadians are spending more time in the workforce than ever before.
In 2005, about seven percent of the Canadian workforce was made up of those 65 and older. By 2015, that number had nearly doubled to 13 percent - and the percentages continue to trend upward.1 While 55 or 65 used to be the standard, it’s possible today’s millennials could be working through their sixties and into their seventies.
Whether you plan on retiring early or if you want to continue working as long as possible, that makes a big difference in how long you have to save for retirement. The earlier you plan on retiring, the more money you’ll need to save and prepare for use in retirement.
Question #2: How Much Do I Need to Retire?
When you’re a young professional still finding your footing in the workforce, it can be hard to imagine exactly how much you’ll need to retire. Retirement is likely decades down the line, and plans may change drastically between now and then.
If you’re able to estimate how many years you’ll likely be in retirement, you can work with a financial planner to break down what you’ll need to start saving now. This can get complicated, as your retirement savings will grow with compounding interest over time. Your financial professional may have a retirement savings calculator to help you determine the right amount of savings to contribute each month.
Question #3: When Should I Start Saving?
This is a common question with a fairly simple answer: the sooner the better. When you are young, retirement seems so far away. But young professionals tend to be at a more volatile point in their careers - they may switch jobs or be laid off for a period of time while working to find a steady position or certain career path. With this in mind, the earlier you start saving, the more time you have to allow your savings to grow. This can help make up for “lost time” due to unemployment or other circumstances in which you are unable to set aside retirement savings.
How to Save for Retirement
Now that you know a bit more about preparing for retirement, how should you go about it? Where should you be putting your money each month? The Canadian government offers several saving avenues to help you save for retirement, including RRSPs and TFSAs.
Registered Retirement Savings Plan (RRSP)
With an RRSP, you are able to contribute up to 18 percent of your previous year’s earned income.2 This can go up to an annual maximum - $27,830 for 2021.3 Your contributions are tax-deferred, which can lower your taxable income during the years in which you make contributions.
Tax-Free Savings Account (TFSA)
The annual TFSA contribution limit for 2021 is $6,000.4 Unlike an RRSP, the money you contribute to your TFSA does not reduce your taxable income for the years you make a contribution. It does, however, allow your investment to grow tax-free. In retirement, the withdrawals you make from your TFSA are typically tax-free.
Planning for retirement can be a daunting process, which can cause many people to continue to delay it. If you’re not sure where to start, speak with an experienced financial professional. It forms strong saving habits when you start planning early, and you can always adjust your savings accounts as you experience life changes.
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