Building Blocks is a special personal finance web series geared towards educating families on money-related topics. A collection of stories, videos and discussions, Building Blocks will run online until the end of December.
As never before, young families are expected to stretch limited pay cheques to meet an expanding array of financial goals.
For many in their 20s and early 30s, there is the need to juggle debt payments, child costs and saving for that first home. If that weren't enough, much of the investment industry – that vast array of banks, mutual fund firms and investment experts – is quick to point out that the earlier you begin socking money into an RRSP, the longer it will have to grow tax-free and the bigger your investment pile will be in retirement.
But does saving for the golden years three-plus decades away make sense when that first house is getting increasingly unattainable and debts still linger from student days?
Even among financial experts there doesn't seem to be a straightforward answer.
“For most younger people, there are many other overwhelming issues than retirement planning,” said Jim Otar, a certified financial planner and author of a number of personal finance books including Unveiling the Retirement Myth .
Mr. Otar argues that, on paper at least, a family could stash a sizable amount away from the taxman every year.
The Thornhill, Ont.-based adviser gives the example of someone earning $60,000 with no company pension. That individual could divert about 36 per cent ($21,600) of that income to retirement savings. That's made up of RRSP contributions (18 per cent), a 10 per cent CPP contribution (employee and employer) and a $5,000 TFSA deposit (8 per cent).
But “in real life, immediate basic expenses take precedence and retirement savings usually go to the back burner.”
That saving-like-there's-no-tomorrow strategy also does nothing to tackle debt.
“When it comes to retirement savings, I believe, paying off debts is a higher priority,” Mr. Otar said. “Once debts are paid off, it becomes much easier to save for the retirement. Realistically, I don't see many Canadians starting retirement savings before age 40.”
TFSA vs RRSPRetirement planning has gotten a little bit more complicated since Ottawa introduced Tax Free Savings Accounts (TFSAs) last year. They, along with RRSPs, are the most popular ways for Canadians to grow retirement savings in a tax-free environment. The two investment vehicles are also quite different: RRSPs shelter pre-tax income and while savings grow tax-free inside the plan, are subject to tax when withdrawn. TFSA savings represent after-tax savings so whatever is in the account can be used anytime, for any purpose without impacting an individuals tax status.So which is a better savings vehicle for young families? The simple answer is it depends on your situation. “Which one is better is going to be determined by what your tax bracket is when you are putting money in and what it is going to be when you are taking money out,” said financial planner Ed Rempel. “When you are starting out people are in a lower tax bracket, probably the [TFSA] is a better deal. The problem is that people are tempted to take it out,” he said. Simply put, RRSPs provide a better “bang for the buck” in terms of tax savings for higher earners, while lower earners using a TFSA are putting away money that has been taxed at a lower rate. Financial planner Kevin Cork noted that RRSPs have a psychological advantage in the form of federal rebate cheques when Canadians weigh the pros and cons between the two. “Any kind of government money is very attractive to most people. [The TFSA] is far less satisfying to save in.” |
