Three reasons you should start planning for retirement in your 20s

When you are in your 20s, retirement can feel like a lifetime away — something to think about later, once your career is established or you’ve when hit other financial milestones. But the truth is, the earlier you start planning, the easier and more rewarding retirement becomes. Whether you’re earning your first paycheque or still figuring out your financial priorities, taking small steps now can make a big difference later. 

Here are three reasons to start planning for retirement, and simple ways to start.      

1. Why you should start early: Setting the habit

It is easier to form lasting habits when you’re young. For many, your 20s mark the time in your life when you are transitioning from financial dependence to independence. Since you’re just starting your career, your income is likely lower. Striving for independence too quickly can lead to a habit of living paycheque to paycheque, which is a hard habit to break once formed. Ideally, you should strive to live on less than your income and save a minimum of 10 percent for future needs. As your income increases, consider increasing the percent of income you are saving rather than just your monthly expenses.

2. The miracle of compound interest

One of the most significant benefits of saving early is that your money has more time to grow, meaning you don’t have to work as hard to achieve your savings goal. Money invested earns interest or increase in value over time. If all that growth is re-invested it earns interest too. To provide some context, consider this example:

• If you save $100 per month starting at age 20 and continue until your 65 years old, and assuming that money earns an average rate of five percent interest, the total amount available at age 65 would be $202,653. That includes $54,000 in contributions and $148,652 in interest.
• If you wait until your 40 years old to start saving and continue until your 65 years old, you would have to save $180 per month to achieve the same savings of $54,000. Assuming the same average rate of interest (5%), the total amount available at age 65 would be $107,195.

By starting 20 years earlier, your total retirement savings nearly double, even though the monthly savings amount is lower and likely easier to maintain.  

3. Increased financial security

In Canada, government pensions consist mainly of Canada Pension Plan (CPP) and Old Age Security (OAS).  In 2024, a person who is entitle to the maximum CPP and OAS will only receive about $2,160 per month before tax. The Government of Canada publishes annual statistics called Low Income Cut-Offs (LICO) that provide information about the cost of living in different parts of the country. The most recent statistic available online is from 2022 states that a single person living in a larger urban center requires $24,347 per year (after tax), or $2,028 per month, to meet basic needs. Accordingly, the current CPP and OAS are only enough meet the most basic needs. Many people say even that amount is not enough.

To retire more comfortably, it’s essential to build you own savings to supplement government benefits. Starting early also gives you flexibility — whether for a planned early retirement or an unexpected one due to injury, illness, or age discrimination. Having your own retirement fund can help you manage though life’s uncertainties.   

Getting started

1. Take advantage of employer plans

Many employers offer some assistance in saving for retirement, including pension plans, group RRSPs, or TFSAs. Often, they match employee contributions up to a limit. Contributing enough to these savings plans to maximize your employer’s contributions is a great way to grow your savings. If you don’t contribute, you likely get nothing. It’s like free money. Setting it up so your savings are automatically deducted from your paycheque makes it more likely you will save those funds rather than spending them.

2. Choose the right investment account

For those who do not have employer sponsored plans, or for anyone wanting to save more than the employer plan allows, or to have more control over your investments, there are 2 types of tax-sheltered investment accounts in Canada that you can set up: the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Account (RRSP). Both allow your savings to grow without being taxed on that growth and therefore both make excellent choices for growing your retirement savings faster. The main difference between these accounts is when you pay tax on the amounts contributed. For a TFSA, you pay the tax before putting money into the account and then you don’t have to pay tax when the funds are withdrawn. With an RRSP, you either don’t pay tax on the income put in, or you receive a more immediate refund of your tax paid, but when you withdraw the funds, you must pay tax at that time. The result is that if you’re currently in a lower tax bracket, it’s likely more beneficial to put your retirement savings into your TFSA first. If you’re in a higher tax bracket, it’s likely more beneficial to put your money into an RRSP.

3. Diversify your portfolio

Diversifying your investments helps you reduce risk. That means spreading your money across different types of assets (stocks, bonds, money market funds, GICs), industries (tech, banking, manufacturing, real estate), and regions (Canada, the U.S., international).

A diversified portfolio reduces the chances of major losses and helps you keep up with inflation. If this is something you’re not comfortable with, it might be worthwhile working with a reputable investment advisor — but remember, they often earn commissions, so your long-term returns may be lower.

If debt is preventing you from saving

Starting to save for retirement in your 20s has many advantages — but if you’ve missed that window, now is still better than never. 

If debt is standing in your way of saving, addressing it early will help you to save more in the long run. If you’re struggling to manage it through budgeting, a Licensed Insolvency Trustee (LIT) like MNP Ltd. may be able help. In many cases, an LIT can reduce your debt through something called a Consumer Proposal, helping you start saving faster than if you paid the debt in full plus interest. If you want to explore your options, give us a call for a free consultation.