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.
Watch financial planner Ted Rechtshaffen discuss various strategies for when and how a young couple can start saving for retirement.
"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 RRSP
Retirement 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."
Kevin Cork, a certified financial planner and president of the Calgary-based Absolute Group Inc., agrees that the investment industry's message that it is never too early to save for retirement can come into conflict with the everyday reality of childcare costs, buying a dependable vehicle or saving for a house downpayment. In his experience, young families come to him asking for a retirement blueprint fairly early.
"Thirty seems to be a good wakeup call based on how I see clients responding," he said. "Actually it is one of two events that trigger an interest in financial planning: it is either turning 30 or getting married - and especially having kids."
Mr. Cork is a big believer in what he dubs "temporary RSP plan." While the savings vehicle is registered and thus tax deferred, "that is basically to save money for a house." A married or common-law couple can save and shelter up to $50,000 to eventually put towards a downpayment.
"You are just putting it in a daily interest account or money market fund, you are not really investing it for the long term, it is more of a savings RRSP," he advised. Saving up enough so that first-time buyers have 20 per cent down for a house and can avoid Canada Mortgage and Housing Corp.'s fees is also key to freeing up cash flow for retirement savings, he said.
The adviser has also found that this savings strategy provides a reality check for young, would-be home buyers. He works with clients to figure out what the difference will be between renting today and the future costs of carrying a mortgage and assorted upkeep and expenses, making that difference their regular RSP payment. "If you can't afford it, and some people really can't, then how are you going to afford the mortgage?"
. Weigh in on whether you would stash some extra money into an RRSP, RESP or a TFSA.
Brampton, Ont.-based certified financial planner Ed Rempel is a believer in an early start to retirement savings but, like the other experts contacted for this article, is realistic. "There is no magic date, but the sooner you start, obviously the better," he said. "Often what happens is, people put it off, and there is never really a good time. You buy a house, you get married and you have kids, there's daycare, so when is the good time going to be?"
Real estate costs can be a retirement savings killer, Mr. Rempel notes. He gives the example of a young couple who purchased a condo when they got married, and now a year later with a baby on the way are shopping for a house. "The advice we give people is, don't buy a place you don't expect to live in for at least five years because you are probably not going to make anything [on the resale]when you include buying and selling costs."
He, like Mr. Otar, advises young families to put aside even a small amount every month, such as $50 or $100, to get into the habit of saving for the future. "You don't have to put away a lot if you are young."