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Millennials often face the double-whammy of student debt and low income as they begin their careers but experts say they can’t afford to put off saving for retirement. (Darryl Dyck for The Globe and Mail)
Millennials often face the double-whammy of student debt and low income as they begin their careers but experts say they can’t afford to put off saving for retirement. (Darryl Dyck for The Globe and Mail)

STARTING EARLY

Parents of millennials, when it comes to retirement saving lead by example Add to ...

Growing up in Hamilton, David Baskin had a mom with a math degree who took care of the family’s finances and taught him how to read stock quotes in the daily newspaper when he was 10. Having practised law before moving into the financial-services sector in 1980, the founder of Baskin Wealth Management has passed his money skills to his own grown children, who are avid savers.

Not everyone grows up with the kind of financial know-how that the Baskin children did, but parents are the most influential financial instructors that their children will ever have. And one of the most important lessons they can impart is the need to start saving for retirement early – as in, straight out of high school. Millennials have the most to gain by putting aside money every month for the future yet are the least likely to do so. It’s hard to blame them; retirement isn’t exactly a hot topic on Snapchat.

“There’s no substitute for engaged parents,” Mr. Baskin says on the phone from his Toronto office. “Saving for retirement is one of the areas where leading by example really works.”

While 57 per cent of millennials – those born roughly between the early 1980s and 2000 – would like to retire by age 60, just 27 per cent think that’s a realistic possibility from a financial standpoint, a recent Toronto-Dominion Bank survey found. Canadians under 34 are the least likely to be thinking about or saving for their golden years when compared to older generations, with 52 per cent making contributions to their retirement savings, compared with 69 per cent of those aged 34 to 50 and 64 per cent of people in their 50s and 60s.

So how can adults, educators and parents convey to those planning their high-school graduation that wealth management starts now? And if today’s youth do have the foresight to open up a tax-free savings account (TFSA) – or the good fortune of having their mom or dad start one for them – upon high-school graduation, what are ways to convince them to keep that cash tucked away until 65 rather than blow it on an engagement ring, a car or a trip to Southeast Asia?

Money management for millennials must be personally relevant, says Nancy Phillips, founder of Zela Wela Kids, which aims to build and improve children’s financial skills. She suggests starting by having them identify their personal values, passions and goals.

“Find out what they want in their future, their biggest dreams and goals, and connect the outcomes to that emotion,” says Ms. Phillips, author of The Teen Steps to Success Guide and other financial books.

“Most financial and life decisions are made mainly with emotion and justified with logic. Millennials tend to base a lot of importance on experiences; this may be a great place to start. Companies appeal to our emotion all the time to sell clothes, coffee, phones and cars; let’s also use this knowledge to help our youth and their future financial well-being. As [personal-success author] Napoleon Hill said, ‘Desire is the starting point of all achievement.’”

An effective activity for young people is to draw a “life path” of things they want to do, be and have, she says. The long curving path, ideally drawn on a very large piece of paper, can be divided into 10 sections, each representing 10 years.

“In our society it is very easy to get caught up in what other people think of what you have or how you look, so the present may be all that seems important,” Ms. Philips says. “This activity is a great way to visualize what you want at each stage and age of your life and realize there are other stages.”

To reach their goals, young people need to grasp that money isn’t just for spending. Ms. Phillips teaches what she calls the GISS Method: give (10 per cent), invest (15 per cent), save (25 per cent), and spend (50 per cent, on expenses and, carefully, on fun).

“The [GISS] process prevents overspending if you stick to it and increases investing dollars when income rises,” she says. “It is critical that young adults understand their money needs to be used for different purposes in order for them to become truly financially independent and ultimately financially free in the future.

“Financial freedom occurs when their investment income is greater than their monthly expenses. Many people who appear wealthy simply have high incomes but little or no net worth; they may also be in huge debt and not even close to financially free.”

Financial experts agree that teaching children about money early is vital, as early as 5 or 6, or at least well before they start using credit cards and apps.

“Research has shown our belief system around money is set by age 7, mostly from modelling the behaviour of those who raise us,” Ms. Phillips notes. “Since habits are formed by repetitive behaviours, it’s extremely important to allow kids and teens the opportunity to divide up and manage money when they’re young, especially now that most transactions are done without cash.”

Another point to consider when it comes to millennials and money is this: If youth is wasted on the young, so is the power of compound interest.

Interest that’s calculated on the initial principal as well as on the accumulated interest of previous periods of a deposit, compound interest makes money grow at a faster rate than simple interest.

A single contribution of $10,000 into a TFSA at 18 becomes more than $257,000 by 65, assuming a 7-per-cent return during that period.

Here’s an example that Ms. Phillips uses in the Teen Steps guide to demonstrate the impact of investing early. Say you start investing $2,000 a year at 19, then stop at 29 for a total investment of $22,000, while your brother starts putting aside $2,000 at 38 until he’s 60 for a total investment of $46,000. Assuming an annual return of 6.5 per cent, you’ll have more than $231,000 in your portfolio by 60, while your brother will have about $107,000 – and he will never catch up.

“The most important thing you can teach kids about investments is the notion that time is your friend,” Mr. Baskin says. “The greatest advantage an 18-year-old has over me is 45 years more than me to compound their money.”

An easy way to get millennials started on the path of saving and investing is to get them accustomed to the “pay yourself first” approach by setting up automatic withdrawals.

“Think of an amount so that when your paycheque goes in, money comes out and goes straight to a savings account, not unlike a cellphone bill or hydro bill payment,” says Linda MacKay, senior vice-president of retail savings and investing at TD Bank. “It can be a small amount of money; maybe it’s $25 or $35 a paycheque. Each year it can go up even by a couple per cent. Getting started is the most important part.”

Once they enter the workforce, millennials should inquire about employee benefits; that aforementioned TD survey found that almost 36 per cent of millennials don’t know whether their employer offers a matching retirement savings plan (RSP) program. If they happen to receive a windfall, such as a bonus or a tax refund, some or all of that should go toward retirement savings as well, Ms. MacKay suggests.

Should young people shirk saving for retirement or be tempted to pull from their savings to travel or make a big purchase, Mr. Baskin has some advice.

“We live in highly taxed world, and it’s getting more highly taxed all the time,” he says. “It’s very difficult to get ahead when you’re saving after-tax money. Vehicles like TFSAs or RSPs give you an opportunity, if not to beat the system, then at least to live with it in a more comfortable way.”

With government programs such as Old Age Security and Canada Pension Plan offering a “pittance,” you can’t live comfortably in retirement without saving beforehand, he adds. “Governments are not going to take care of you. The Prime Minister can’t convince me that the safety net is going to become more robust. You have to take personal responsibility for your own financial well-being.”

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