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Retirement saving ranks low for the young - and that's okay Add to ...

One of the country’s sharpest minds on retirement saving has something to say about the trend of young adults dodging RRSPs.

A recent poll suggests that the number of people aged 18 to 34 who have registered retirement savings plans has fallen to the lowest level in almost a decade at 39 per cent. Asked to rank their financial priorities, people in this age group put retirement seventh, behind such things as debt repayment, general saving and home ownership.

Do we need to start worrying? Is there a retirement calamity in the making? No, says pension consultant Malcolm Hamilton. To him, these young adults are making smart choices.

“It’s uplifting, in a way,” said Mr. Hamilton, who works for the human resources consulting firm Mercer. “Debt reduction probably should be a priority, as should buying a home, if you’re going to buy one.”

The poll, commissioned by Royal Bank of Canada, also suggests that 45 per cent of young adults have not started saving for retirement. Truth is, it’s never too soon to start putting money away in an RRSP because of the opportunity for long-term, tax-sheltered compounding of returns (read more here about how tax-free savings accounts are also worth a look: tgam.ca/BZR4).

But few young people are in a position to save for retirement while also paying off student debts and saving the hefty amounts now needed for the down payment on a house. That’s why RRSPs in some cases have to step back in the queue.

Mr. Hamilton’s guidance on RRSPs versus debt repayment is to look at the risk-free rate of return you can get from investing. Right now, that would be the 2.5 to 3.5 per cent available from government bonds and guaranteed investment certificates maturing in five to 10 years. True, you can theoretically make more from the stock market. But you can’t count on that.

Now for the rates of interest on your debt. Student loans are in the range of 5.5 per cent for floating-rate loans and 8 per cent for fixed-rate loans right now, while credit card debt typically comes with an interest rate around 19 per cent. Clearly, there’s an argument that money spent on debt reduction brings a greater guaranteed benefit in the short term than investing.

What About Retirement Saving?

What about your long-term goal of retirement saving? Mr. Hamilton said you can get to that when your debts are repaid. Simply redirect the money that went to loan and credit card payments into your RRSP or TFSA.

Young adults who want to buy a house should focus on their down payment as opposed to RRSPs in order to lighten their mortgage burden as much as possible, Mr. Hamilton said. Low interest rates make big mortgages affordable today, but rates are expected to move higher in the coming years. “The scary scenario with rising interest rates is that mortgages come up for renewal long before anybody’s made any headway on paying them off.”

Where Mr. Hamilton does have some concern about the financial habits of today’s young adults is in the way they’re doing everything later in life than their baby boomer parents. Members of the boomer generation typically got married in their 20s, had kids in their late 20s or early 30s, and they amortized their mortgages over 25 years.

Young adults today graduate later, and in more debt, Mr. Hamilton noted. They also have kids later, buy homes later and amortize their mortgages over longer periods. This is significant from a financial point of view because it means today’s young adults will pay off their mortgages and have their kids leave home later than their parents. In turn, this means they could be 55 or 60 by the time they’re able to bring maximum resources to bear on retirement saving, whereas their parents might have been 45 to 50 at this same point in life.

Why It Doesn't Hurt

Mr. Hamilton said today’s young adults will likely live longer and work longer than their parents, so the later timetable may not hurt them much.

Neither, for that matter, will decisions made today by people aged 18 to 34 to postpone RRSP contributions for a bit.

“When you look at people that age, they’re just starting out,” Mr. Hamilton said. “There are countless financial decisions they need to make in the coming years that will ultimately determine whether they’ve behaved sensibly and prudently or not.”


Royal Bank of Canada commissioned a recent poll that looked at the financial priorities of Canadians. Here's a look at the priorities of young adults aged 18 to 34:


Percentage of People Who Ranked this 1st, 2nd or 3rd

Regular payments to reduce debt


General savings for a rainy day


Home ownership


Just trying to keep head above water


Saving for a large purchase


Saving for children's education


Retirement savings


Home renovation


Supporting aging parents


Building an investment portfolio


Source: Ipsos Reid poll of 1,457 adults conducted last fall

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