The Generation of Not Saving for Retirement

According to a recent RBC poll 45% those 18 to 34 are not saving for retirement and only 39% of this age group have an RRSP.  Well given I’m doing both and in that age group I’ll point out a few thoughts on the matter.

When asked what this group’s goals were their top responses were: reducing or eliminating debt (56%), saving for a rainy day (45%) and home ownership (44%).  Well as I recall graduating from university that would have more or less been my response as well.  After all when you just get out you likely have some student debt, perhaps a car payment and you are focused on saving up a down payment for your first home. Now granted you could be saving up for a home within your RRSP, but apparently that isn’t being done that much by this age group since only 6% of them have used this option.

So what gives?  Why aren’t young people saving for retirement?  Well I’m not a mind reader for my generation, but I would suspect that the story goes something like this:  You graduate from some post secondary with debt, that debt is too big to afford a home by yourself .  So while saving up a down payment you are also have to pay off most, if not all, of your student debt.  Then you meet ‘the one’ you get married, which means more debt.  You pay that off and meanwhile house prices in major centers (where most of the jobs are) have spiked and your inflation adjusted wage has more or less been the same as your parents.  So if you are lucky perhaps by the time you are 35 you finally own your home (complete with huge mortgage) and you finally start get serious about some retirement savings. Oh, but the kids start arriving, nuts, now we need RESP’s as well.

The above tale could have described most of people I know.  The exact ages of events might have changed and the order of the sequence of events, but generally that is the story.  About the only difference in that tale and what I did was I always took advantage of ‘free’ money from work and joined either the pension plan or group RRSP.  That way I was saving something for retirement, even before the thought of early retirement had entered my head.  Also I was one of those 6% that did use my RRSP to help buy my first home.  My thought was why not use it to give my money a 25 to 30% boost from a tax refund and get me into a house that much sooner.  It had nothing to do with saving for retirement.

So in general I get the reasons why people don’t save in this age group.  You have a lot of your plate, but the reality is that isn’t an excuse.  You could be saving something for retirement or getting that ‘free’ money from work.  It might be a tiny amount, but the advantage of starting young is you have time for compound interest to give you a helping hand.

Now it’s your turn, if you are in this age group how close was your story to the one I told?  If you are not in this age group what was it like when you left school, do you start saving for retirement right away?

26 thoughts on “The Generation of Not Saving for Retirement”

  1. I just left that age group in September of last year and given the statistics you present I suddenly don’t feel as bad about what I did do right …

    Like yourself I used my RRSPs to help pay for my first house. I’m still buying them back, slowly – but I believe for good reason. The reason is my work pension plan which is a pretty good one. I prefer to contribute to our TFSAs over our RRSPs right now due to the stable pension decades from now.

    So while we don’t have a TON of saving, and we certainly won’t be retired @ 45, when I evaluate my pension worth (and matched employer contribution) plus our (kinda measly, but improving investment portfolio) i’m not feeling so bad about our situation!

  2. This is what bothers me about being 33: I generally get lumped in with the age group 18-34. So much happens in a person’s life between graduating from high school, and having worked for almost 10 years (with a house and young family), that it feels like comparing apples to oranges (and every other type of fruit).

    What was different in my scenario is that I was lucky in buying a house before prices spiked (by a year or two) and as I paid off my mortgage, I reborrowed the money to buy investments. My total debt stayed constant, but I was building assets (and increasing the tax-deductible portion of the debt). Now that the mortgage is gone, I’m focused on paying off investment debt.

  3. What’s the point of buying RRSPs? No matter how I think it, it’s a tax trap. You contribute to reduce your (already low) income – if you are under 35. Then when, hopefully you are making more, you get dinged. RRSP’s are for people who PLAN to make less money in retirement. That’s a pretty stupid strategy. The government knows full well that you’re rolling up money year after year only to pay the full amount of tax back PLUS what you’ve accumulated in growth. It’s a tax deferral + strategy. Maybe young people haven’t rationalized this, but I certainly have.

    Since my focus is rentals, my plan to earn MORE in retirement i.e. when rentals are paid down. It makes no sense for me to use RRSP’s.

    Old people have always preached RRSP’s to me. But their only rational is to avoid paying taxes right now. Listen old people, the bill WILL come due, only it’s going to be when you least want it. Old age is NOT the time to live on a stretched income, that’s for your 20’s and 30’s when you’re more flexible and willing to tolerate discomfort. Thankfully we have TFSA’s to really save us.

  4. Your financial scenario is similar to what I faced after I got out of college back in 1985.

    I had student loan debt, a desire to own a car, a desire to save for retirement, and a desire to own my own residence. But, I also wanted to avoid holding more than one the “big 3” of debts at the same time – student loans, car loans, and home loans a.k.a. mortgages.

    This meant that I had to carefully balance my approach to meeting these desires. To first pay off the student loans, I was not fully maxed out my 401(k) contributions which were eligibile for the 50% (at the time) company match. Doing this enabled me to buy my first car in cash and avoid taking on a car loan while still paying off the student loan.

    Once the student loans got paid off, I was able to accelerate my saving for the purchase of the apartment I own. Once that was done, I upped the 401(k) contributions to the maximum level subject to the company match. I also began investing in ways other than having my money in a bank account after the interest rate (more than 7% on Money Market Savings in 1989, quickly dropping to under 2% in early 1990) took a big hit.

    Interest rates were high when I bought my apartment, so a few years later I was able to refinance the mortgage. It took me about 18 months to recover the closing costs so after that my investment account balances were zooming upward again as my next goal was to become debt-free and pay off the mortgage.

    While I was doing that, I contributed some after-tax dollars to my 401(k) for a few years while my company upped its match to 75 cents on the dollar from 50 cents. So I was able to pay off the mortgage and increase my 401(k) balance at the same time, achieving the former by the time I turned 35.

    This was the late 1990s, so I saw my 401(k) and taxable account balances soar. My company just created its ESOP and that soared in the 2000s, its value exceeding my 401(k) value by the time I retired in 2008 at age 45 and cashed it out at favorable tax rates (and before its value crashed).

  5. I am 31 and I see my peers in similar scenarios to what you described — and worse. I actually managed to graduate without debt (by working three jobs while in university). My problem was that after school, it took quite some time to get a job that paid anything near a decent wage, and during that time I accumulated a small amount of debt. Nothing extravagant – it wasn’t like I was going out to clubs and taking vacations like many of my friends. Once I got a job that paid well, I realized I needed to get into the housing market, and borrowed some money to help finance that. I did my research and chose an excellent building in a good neighbourhood in the north end of my city (avoiding the trendy thing, which is to automatically buy downtown – and took some flack for that). It turned out to be a very smart decision. I also opted into our pension plan at work and am very glad I did. I took me three years to pay off my debt, and here I am, with an actual net worth for once in my life. My friends and particularly, my boyfriend at the time were not supportive. The attitude was very much “just spend” – regardless of whether you have the money. I would get teased for cheapness because I did not want to spend $300 on a pair of jeans, for example. This mindset I believe is quite common among young people who make average to below average incomes. The attitude is enjoy it now while you’re young and “pay later.” Everything is deferred – including marriage and kids, something I wanted but a lot of young men (and women) seem not to be interested in these days until they’re nearing 40. Party and spend money now, and declare bankruptcy later, I guess? Or simply be a shut in when you’re 65 and have to retire with debt? I’m not saying everyone is like this, but there is a large contingent of my generation who feel it is “normal” to try and live a celebrity lifestyle on limited incomes and with limited ambition.

  6. Being 24, I know lots of my friends are NOT saving their monies or have any plan whatsoever. It’s not even about the RRSP, but financial planning in general.

    My husband and I both started our careers last year, him being an RCMP officer and myself being in the helping profession. It took us about 3 months of realizing that our combined paycheques were going to somewhere unknown. It was the first time we had disposable income like that. Anyways, after realizing we had no plan – we went to the bank.

    We paid off our cars in full and upped our mortgage payments so we can pay off our house (mortgage over 300 :S) in 10 years instead of 25 years and opened up RRSP’s and contribute to them on a monthly basis. Having our money put directly into our mortgage and long-term savings allows us not to touch it. We save for things we want instead of just buying whatever we want, when we want (which happened when we both started working)

    You know though, lack of education plays a HUGE role in the lack of savings/financial planning. We’re not taught that stuff and from experience, it can be pretty intimidating. Lots of different options, opinions and such.

    Anyhow, we question ourselves a lot in terms of if we are making the best financial choice. Hence why I’m on these financial blogs reading away. I’ve learned so much from all your financial bloggies. 🙂 I guess though, we’ve come to conclusion that just the fact that we have a plan is a good thing.

    One last thing – we try to talk to our friends a lot about finances.. just to see what they’re doing (like I mentioned, we question what decisions we’re doing so like to ask people what they’re doing) and I would say that 9/10 of them aren’t comfortable talking about any of it.

    Just wanted to give some hope to ya.. 😉 Some of us “young people” are trying to give the rest of us a better name.

  7. Well I can’t even imagine saving for retirement when I was 18! I was barely scraping by going to college. Seems like the study should have started at 21 to get better data. Having said that, when I graduated at 22 with a car loan, I began charging my credit card (after all I had a JOB now!) to buy suits for work, a briefcase and a couch for my new apartment. It took me 3 years to pay that balance down. I didn’t start saving at all for retirement until was 25 or 26. I knew I should, but I really was living paycheck to paycheck.

    Things got better after that.

  8. I think your time line is right on the money!
    I’m 28, and also would have been in the 6% that used the 20k of RRSP to buy a house when I was 25 and still had 20k in RRSP’s after. I came out of college to a well paying job with no debt (thanks to working my ass off and getting well paying co-op’s, and living at home). However now have a mortgage, dog, baby, and car loan. I’ve actually dropped my RRSP contribution other than the minimum for the HBP repayment till the wife is back working and I crest another tax bracket!

  9. I’m in the same boat as the author and dilbert. I’m 25, have an RRSP (part of which I used for the first time home buyer’s plan). My wife and I know that paying ourselves first is our top priority – which means savings contributions come out of the paychecks first (RRSP’s, TFSA’s, etc).

    Chris L.: your logic about RRSP’s is correct, who would defer tax to a time when they would be in a higher tax bracket? Nobody! The truth is that most people spend less in their retirements due to mortgage being paid off, kids out of home/university, no work expenses, etc. That’s why people use RRSP’s. The average person only needs about 60-70% (or less) of their pre-retirement income to have the same lifestyle they had during their working years. Your assertions about the RRSP program are ridiculous. Good luck with your rental properties once interest rates go up. I imagine you’re highly leveraged to have several rental properties.

  10. @ Dave. The government is growing a massive nestegg. See… their deferred income via taxes is compounding as is your growth via investment. They just get it later and bigger than sooner and less. Planning to make less money in retirement is foolish and also a loser strategy. Now is the time to be doing with less when you are in good health and can withstand suffering. You are going to see more and more people moving out of RRSP’s and into TFSA’s. You are also going to learn more about what a scam it was from the start.

    You know what they say about making assumptions right?

    The bottom line is that rentals is an excellent part of an investment strategy. Some of these other things like stocks and equities are just magic because you’re never really in control. Yes a big part of life is illusions, but selling necessities is as close to a safe bet as you can make in an illusory world.

  11. Another guy in the 18-34 demographic here, I’m 27.

    I find that for most people my age, retirement is so far away that they don’t even think about it. If I work until 67, I have 40 more years in the workforce. I haven’t even been alive that long.

    If someone has debt in the 5-8% range, wouldn’t paying that debt off be the most prudent move anyway? Paying off debt offers a guaranteed return, plus gives the debtor more flexibility. Yes, I realize there are rewards for starting earlier, but the argument can be made that heavily indebted young adults should be paying off debt, not saving for retirement.

  12. 26 here. Graduated from a master’s degree in 2008 with 33K$ in the bank living away from home, in another city (working your ass off and getting scolarships helped).

    I got a good paying (60K$-80K$) job in 2008, bought a house with my girlfriend with a 66K$ downpayment (she also graduated with upwards of 30K$ in the bank).

    Fast forward to now, I am recently married to said girlfriend, have paid over 54K$ on my mortgage as of yet and am maxing both my RRSP and TSFA each year. Oh, we also have a 10K$ emergency fund on the side. Delayed gratification and thinking about your priorities is a must.

    I disagree with the person that said RRSP is for losers. I plan to get out of the rat race in 13-15 years. I will have no “income” between then and when my DB pension kicks in at 60. Since I can live pretty leanly, I can pull out all my RRSPs a little bit each year (9,000$) and pay virtually no taxes on them.

  13. “I disagree with the person that said RRSP is for losers. I plan to get out of the rat race in 13-15 years. I will have no “income” between then and when my DB pension kicks in at 60. Since I can live pretty leanly, I can pull out all my RRSPs a little bit each year (9,000$) and pay virtually no taxes on them.”

    You can define things however you want, but if you call living on $9000/year success, then we’ll never agree. This is what I mean by RRSP’s being a loser strategy. It makes you do stupid things with your money like reducing your income so that you don’t pay taxes (in the future). I for one try to maximize the amount of taxes I owe (every year), that means my income is high. Naturally, I only pay the taxes which I can not avoid. Why PLAN to live on 75% of your pre-retirement income when you can live on 125% of it? Damn future taxes, that means you’re doing well.

    I hear stories all the time about why I shouldn’t pay down my rentals because it’s “good debt.” Seriously? I pay down my rentals, I live off them. Having all this good debt and planning around it is rediculous.

    Often people ignore the choices that paying down debt brings. I have the option of not working, for one, and secondly I can always re-leverage on other investments to increase my (good) debt. That gives me at least two choices. If I have debt, I have no choices. I just have to continue working to repay it.

    “Good debt” is only the money you have lent someone else who’s repaying you on time without hassle.

  14. “You can define things however you want, but if you call living on $9000/year success, then we’ll never agree. This is what I mean by RRSP’s being a loser strategy. It makes you do stupid things with your money like reducing your income so that you don’t pay taxes (in the future).”

    There are several ways that you can pull money out of your RRSP and not pay a cent of tax on them. For example, borrowing to invest and reducing your RRSP by the amount of interest you pay on the investments (ie: RRSP meltdown).

    Calling people stupid because they do not follow your road of choice is narrow sighted at best.

    RRSP in conjunction with TSFA is a win in my book. Maximize investments in present and let compounding do its magic.

  15. That’s hilarious. Where’s the critical thinking anymore. I said “a loser strategy” and “It makes you do stupid things.”

    Since when did I say anyone was stupid.

  16. It’s nice to know I’m not the only one who is actually concerned about how much money our generation is spending and the huge amounts of debt they’re racking up. I’m 26, I own 3 properties with my girlfriend (including principle residence), have no debt outside of the mortgages for said properties and have a net worth of roughly $150,000. We earn approximately $90,000 combined and haven’t had any financial help from family or friends.

    I think a huge part of the problem is with our education system. I have a degree in Commerce from an accredited university in Canada and we never once talked about avoiding debt, basic money management or anything to do with retirement planning. We also never talked about things like mortgages, investing strategies or any type of wealth building strategies. It shocks me that these schools charge $5,000 per year (or more) for tuition and they don’t even bother to cover any of this.

    The other issue for many people in the 18-34 demographic is that once they graduate college/univerisity and get their first “real job”, even if it’s an entry-level job with a $35,000-40,000 salary, that’s still far more money than they’ve ever earned before. If you have little (or no) money management skills as a student making $10/hour at Starbucks, how does a $35,000 salary prepare you any better – Especially when that kind of money doesn’t go very far in most major cities?

    Everyone is accountable for their own debts, and it constantly shocks me that people spend more money than they earn but I really think that if our school system focused more on this growing epidemic, future generations would be far better off and our economies wouldn’t be so heavily reliant on consumer spending.

  17. RRSP is good for high-income people – doctors, lawyers, etc to save on tax level differences now and after, but for a decently paid individuals it does not have any use. I opened an RRSP account accumulating 17K then used it for the HBP when we bought a house. That is all my RRSP experience, I do not contribute to it any more, just paying annual HBP installments. All extra money that I have are used to decrease mortgage principal amount.

  18. Yeah. All the retired people are just ROLLING in it and paying huge taxes becaused they saved on a tax deferred basis. It’s all just a clever ploy by the politicians to ruin our lives. Idiots. I’ll give you Foonie (the five dollar coin that will be the equivalent of a toonie when you and I are in our 70s, so you can stock up on cat food.

  19. Wow, that’s a lot of responses to a post. Thanks for the stories everyone. I’ve got a few comments.

    I agree with Robert that a lot changes during those first 10 years out of school so lumping in the 18 year old people with the 30 to 35 crowd does cause a few issues, but I suppose you have to draw the line somewhere or it is just too much data to report.

    Then onto this RRSP contribution debate. To me it’s straight forward I’m paying almost 40% marginal tax rate so that tax refund is a large incentive to use the program. Also in my case I do plan to only pull $10,500/year/person in retirement if possible to avoid paying tax (since as a couple that will be about 70% of my budget). So I will be combining RRSP/TFSA/Taxable account usage to make up my retirement funds because I’ve just never needed a lot of money to retire and not having to pay tax does save you a lot of savings.

    That being said, I will point out Chris L use of ‘loser’ is damn well close to the edge of my comment policy where I would just delete them. I only let them stand because he does make a good point in regards to depending on what your retirement goals are you might in fact not want to use a RRSP. It certainly isn’t for everyone, but then again with retirement planning nothing is for everyone. Take your pick of what works for you, just keep in mind I expect you all to be civil about it.

    Tim

  20. Don’t be afraid to hear something blunt. If you can back up your use of a strategy then fine. For the average person RRSP’s are blanket, recommended and not for them. I can sugar coat the adjective I use to describe it, but what’s the sense. I’ll say it again, RRSP’s is a loser strategy! Ha. Seriously how why would you even consider deleting a comment because I call a “strategy” a “loser” one? Seesh, lighten up people. Why would anyone take personal offense to having their strategy dismantled. Hey, your strategy is not YOU. Plenty of smart people implement stupid strategies.

    I can agree that it might be good for an extreme high earner…but alas, if you earn a ton of money you have many, many, other ways to invest money than via RRSP. With time, I think you’ll see just what I’m saying. RRSP’s are a tax trap to benefit the government. Only by INVESTING THE REFUND CAN YOU GET AHEAD WITH RRSPS. Most people DO NOT DO THIS.

  21. “Only by INVESTING THE REFUND CAN YOU GET AHEAD WITH RRSPS.”

    Exactly! Would you prefer to invest 1000$ in a taxable account or 1400$ in a tax deferred one? To me, the answer is obvious. Tax mitigation is a cornerstone of my retirement answer.

    Also, the “loser” qualifier refers to the people implementing the strategy, not the strategy itself. This is why people find it offensive. Maybe it was a poor choice of words on your part. “losing strategy” would undoubtedly have been less inflammatory.

  22. The TFSA is by far the winner strategy because the goal is a means to an end RIGHT NOW. Not at some time in the future as in an RRSP. I want my cash back now. I want dividends. So be it if I pay income tax now. My plan is to make more money moving forward not to defer the taxes to a later date AND still pay more taxes. What’s the point.

    Noted about the “loser strategy”, but still what’s the functional difference between doing a bad strategy and losing vs. a losing strategy? Nothing. Money just doesn’t forgive so it’s not going to care how you tip-toe around.

    If you want to grow tax free, fine. However, money now is what matters and in the future the money then (becomes money now) and so you should plan to increase earnings to that point. Otherwise, why not just cut your expenses to 70% and semi-retire now? It’s entirely possible to do this. But then again, it’s a way to cut back and have less. A lose = a losing strategy. I’ve seen far too many people do bad things around RRSP’s that it makes no sense. I’ve heard of some people doing renovations on rentals because it’s a tax right-off. Keeping money yeilds 70% return on your investment vs. tossing 100% to save 30% (in taxes). People can’t do math anymore? In the rental biz you do renos that mitigate or prevent damages and that which increase rent. The rest you pocket.

    Frugal boy. You love me. RE is decreasing month over month. If you want to buy something overpriced go for it. I’m not purchasing anything else because they don’t cashflow. Buying RE right now is a loser strategy too! ha!

    Either way, I benefit from RE not dropping. Obviously. However, in the long run buying right now is a terrible decision. Pretty hard to predict human behavious. I did learn that people are great followers though, and herd up nicely. They never do rational things while herded. Just wait to see what happens when the herd shifts and be ready.

  23. I have yet to see any stories that talk about this age bracket’s struggle. So I will offer up my story. Age 25, married – 2010 combined income $70,000, live in Toronto.

    I did not grow up in Toronto, I lived in a smaller city where the cost of living is very low. I studied Marketing & Advertising and came out of school with approx 20k in student LOC. By the way I always had one or two part time jobs that payed for my Car, insurance (no public transit) & bills. Right after school I moved to Toronto and starting working at an Ad Agency that paid me 28k. I was already engaged so my wife and I got married a few months after I had moved to Toronto. We rented a 2br apartment for 1050/month which is a steal in TO.

    So our combined debt load was approx 30k. My wife had some College education but it would take about 1 year before she had full time work. She worked PT so our first year of marriage we made only about 35k. I was 23 at the time.

    Each year since then we have made about 15K more each year. I am about one promotion or job offer away from increasing my income to over the 100k mark.(I am on the short list for a major media company)

    So like most people coming out of school we carried a lot debt and started at the bottom in pay. The problem is really getting to the place where you can pay off the debt, save for a down payment for a house and think about investing for your future. We almost never went out, and most our money went to Rent or car & loan payments which did almost nothing.

    Last year we started a RRSP with the idea of using it to save for Down-payment for a house. As well we were able to pay off a few debts. This year I opened a TFSA as well and we are focusing on paying off debt. Our income will be between $80-100k this year depending on what happens with my job.

    That all being said. The toughest part for most students is getting out of the hole they created while in school. Most students don’t really think about 10k here or there in student debt. You believe well I will be making lots of money some day, so whats the big deal. Most probably don’t factor in the cost of living in places like Toronto or Vancouver.

    Really for us the best thing to do has been to set goals and make sure we stick to our plans. We choose to stay in the apartment we started in, now 1115/month instead of paying upwards of 1500-2000 a month, which is very common. This way we can afford to pay down the debt and save for a house and retirement.

  24. I think RRSP has a very limited use only in a very few instances:
    1. When your company contributes to the RRSP as a bonus
    2. When you want to use it to purchase your first home
    3. When your income is too high

    Otherwise it is a financial trap. Money will be depressiated with inflation. And imaging another scenario – you die and your RRSP will be taxed at 45-50% (as a one-time income) before it goes to your children.

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