Too young and too poor to invest in an RRSP?
Despite being bombarded with ads suggesting that it’s time to contribute to an RRSP (Registered Retirement Savings Plan), many young adults think that these messages are not aimed at them.
In a survey conducted recently by Ipsos Reid for RBC (Royal Bank of Canada), 45% of Canadians between 18 and 34 have not yet started to save for their retirement. According to the same survey, saving for retirement ranks only seventh in their list of financial priorities.
Why this lack of interest?
Are students less likely to put money aside because their wage deductions and other payments take such a big bite that they don’t have enough left over to even think about?
Penny Ellison, financial planner and instructor at the John Molson School of Business, suggests that young people really don’t know what an RRSP is. She says most are unaware of the advantages RRSPs offer, including those they can use long before retirement. “After all, it’s not an investment – like a guaranteed investment certificate, bond or a share in a Canadian company – but rather an investment account,” says Ellison. She adds that “unlike a personal investment account, an RRSP is by definition registered with federal and provincial tax authorities.”
In any case, experts advise contributing to an RRSP as soon as possible in order to have more years to accumulate a substantial amount for use during retirement. And that’s without considering the interest income that will be building up over a long period.
A retirement nest egg requires three elements, says Ellison:
- A suitable rate of return;
- An extended investment period.
“Because it’s hard to save, young adults don’t see the point of opening an RRSP account,” she says. “They forget that they have the advantage of a long-term investment horizon and the possibility of opting for riskier investments that are likely to pay off in the long term.”
“Their contributions don’t have to be big. For example, a person who puts just $50 a month in a mutual fund starting at age 21 can expect to have $190,800 at age 65 if the return averages 7.25% per year, according to the rate assumption given by the Institut québécois de planification financière (IQPF). It’s as easy to arrange an automatic transfer to an RRSP account – even a small amount – as it is to spend a bit less,” Ellison points out.
Another advantage: Withdrawals from an RRSP are not taxable if used to buy a home (Home Buyers’ Plan) or to pursue an education (Lifelong Learning Plan).
Our expert concludes, “The financial planners are right: It’s never too soon to open an RRSP.”
• John Molson School of Business
• Institut québécois de planification financière