Why thinking about retirement at 18 gives you a gigantic edge

We’ve all sat in the middle of a conversation of baby boomers discussing their retirement. We’ve all seen people around us getting happier and happier as they approach retirement age. We all thought that retirement was a topic that didn’t concern us young people! However, the wisest among us are already thinking about it and organizing their finances… even by the age of 18!


Investing in retirement: when should you start? 

It’s a legitimate question: when should we start planning for retirement? The experts all agree that “the sooner the better”! Statistics don’t lie when it comes to profitable investments either: it is reported that the first 10 years of “working life” – a term that refers to anyone who is active in the workplace – represent 50% of retirement investments.


Investments that pay off? – Yes, please!

The sooner you start saving for your retirement, the sooner you’ll accumulate money, and the more that money will grow. This rule is simple and applies as follows: $5,000 invested in retirement savings annually, with an interest rate of 5%, will result in $62,889 in 10 years. If we leave this amount in the bank for 25 years, with the same 5% interest rate, we will have $212,964 in our retirement savings account. These investments are tax-sheltered and eligible for a deduction each year. You will be taxed when you withdraw your investments at retirement, but it remains one of the best tax vehicles.

If you can’t afford to save $5,000 every year, you should put in place a financial plan that respects your budget. It may seem like nothing, but $30 a week for your retirement is equivalent to investing $1,560 after one year. With a 5% interest rate, you’ll see your investments grow from $1560 to $8190, in just 5 years!


OK, I’m tempted, but… how do you go about it?

So how do you set up a retirement savings account ? Create a 3 steps financial plan! This allows you to manage investments and strategically place your cards for retirement.

  • Step 1: Saving 15% of your net income is the first thing to do when thinking about any type of investment. 10% for long-term savings.
  • Step 2: Open an RRSP now. No matter how much you are able to contribute. The contribution limit for 2020 was 18% of annual income.
  • Step 3: Take out a TFSA, a tax-free savings account. These accounts are used to finance your projects and should be considered separately from your retirement savings accounts.

To do all three, we recommend (and this is the key to success in the world of personal finance) that you make a budget. Many Canadians do not do this and are unfortunately in debt. 


The benefits of a retirement savings account, right here (right now)

You now have a better understanding of how retirement savings accounts work and, more importantly, how to get started. For the more skeptical among us, here’s a fairly comprehensive list of the significant benefits of saving for retirement now.

1. Saving for retirement = earning money

This is a simple equation! It’s the first thing a good financial advisor will tell you to budget. Saving money is the same as paying yourself a salary! For some people, this outflow of money may be considered a “loss”, but cheer up and put a positive spin on it : retirement savings are for you!

2. Putting money into an RRSP = the opportunity to use your savings for a first home purchase

Tax-free investments are wonderful. With the HBP (Home Buyers’ Plan), a withdrawal from an RRSP retirement savings account is tax-free for the purchase of a first home. You can withdraw up to $35,000 for the house of your dreams.

3. Investing in a retirement savings account = tax refund

By contributing to a retirement savings account, you’ll receive a tax refund on your investments, up to a marginal tax rate of 40%. Several conditions apply, but anyone who invests in RRSPs is entitled to a tax return. If you’re smart (like those 18-year-olds who are already saving for retirement!), you’ll be able to take advantage of this and reinvest it effectively.

4. Saving earlier = financial freedom earlier

In Liberty 45, a book that shows us all the steps to plan for retirement at age 45, the author, a CPA, suggests saving massively. Retirement savings investments are indeed the most tax-efficient vehicles, although the author of the book also suggests that we diversify our financial portfolio.

5. Saving for retirement = saving money = stop spending for nothing = bravo, you are more responsible towards the environment.

Are you climate-anxious? Take the guilt out of it by thinking about what a tight budget can do for the environment. No more rushed morning take-out coffees (we opt for a reusable cup and save a $3 a day); no more clothing shopping spree (we opt for a minimal wardrobe); we ride our bikes more often for our commutes. We can even save by doing some of our grocery shopping in bulk stores.

There are preconceived notions about retirement and many young people are quick to dismiss the possibility of saving now in an RRSP or a TFSA. Yet these two options are essential to a healthy, balanced and happy financial life. Do you embrace the idea of retiring earlier, or having a healthy portfolio? Retirement savings are probably the best idea for you. If you plan your needs properly, contribute automatically to RRSPs and TFSAs (no matter how much you can afford!), and aim for quality investments.Above all, don’t forget one thing : the main reason to save is YOU. 

Arthur Dubois is a personal finance writer at Hardbacon. Since relocating to Canada, he has successfully built his credit score from scratch and begun investing in the stock market. In addition to his work at Hardbacon, Arthur has contributed to Metro newspaper and several other publications