Thank you to the Canada Pension Plan Investment Board for sponsoring this post on saving for retirement in your 20s. As always, all opinions are my own.
As a tween, I thought it was smart to buy an $80 sweater with all of my savings instead of using it to buy food.
When I got my first summer job as a teenager, I learned exactly how much work went into making just $9.60 an hour.
A full day of work didn’t even cover the cost of that darn sweater.
As I’ve matured since my tween days (thankfully), I’ve realized how important it is to save up for your retirement as early as in your 20s.
I’ve been speaking with the Canada Pension Plan Investment Board to share with you guys the answers to questions commonly asked about the Canada Pension Plan.
2 in 3 working Canadians don’t know much about this stuff, so it’s something you guys seriously need to be aware of!
It’s important to invest in your financial well-being, and to understand your financial rights and responsibilities as a Canadian.
The more you understand your position financially, the more likely you’ll be able to save up for your retirement needs!
Here’s why you need to be saving for retirement in your 20s.
Don’t I receive government cheques when I’m retired?
You may or may not know about the Canada Pension Plan (otherwise known as CPP).
It’s basically a national fund you contribute to through your payroll to help cover pensions for Canadian retirees.
It’s mandatory for most Canadians to contribute to it, even if you’re self-employed.
Yes, you do receive CPP retirement pension, but it’s designed to supplement your basic needs, not completely replace your income.
The average Canadian receives just over $8,000 annually, and that’s enough to cover the basics.
You still need to have your own savings to cover things like car expenses, going out to restaurants, and travel.
Will the Canada Pension Plan still be there when I retire?
If you know anything about the CPP, you might’ve heard rumours that it won’t be there anymore by the time our generation retires.
I actually just learned about this, but there’s an organization called the Canada Pension Plan Investment Board (abbreviated as the CPPIB) that manages and invests CPP funds in order to sustain it for future generations.
They actively invest the funds that aren’t needed by the CPP to pay current benefits in things like public and private equities, real estate, infrastructure, and fixed income instruments.
The CPPIB is completely independent of the Canada Pension Plan and isn’t government-operated at all.
They’re headquartered in Toronto with offices around the globe.
As of June 30th, 2018, the CPP Fund totalled $366.6 billion, so we definitely don’t need to worry about it not existing by the time we’re retired.
How do I save for my retirement?
When all you want to do with your extra income is order food delivery, or buy a cute new winter coat, you’re probably better off putting that money into your retirement savings.
RRSPs and TFSAs
You’ve probably heard of Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).
RRSPs are deferred from taxes until you withdraw anything (ideally when you retire), and any income you make from TFSAs is completely tax-free.
Another reason to start saving early in long-term investments like RRSPs and TFSAs is that you’ll make more money in the long run thanks to the power of compound interest.
I talk more about the basics of RRSPs and TFSAs in my blog post on making good financial habits!
Ballpark a number for your retirement funds
You should also put together a retirement plan and ballpark a number you’ll need when you retire.
Figure out your current lifestyle and spending habits and what you realistically think they’ll be like in the future.
Let’s say you’re ball-parking something like $1,000,000.
If you were to start saving in your 40s, that’s around $40,000 a year of money that’s going directly to your savings.
That’s a lot of money, in not a lot of time!
If you were to start saving at let’s say, 25, you would need to save $25,000 a year.
That’s difficult for most 25 year old Canadians, but it gives you an idea of what you want to save each year.
Also, don’t forget about compound interest!
Why do I need to know all of this?
You should know exactly what your financial situation is like now in order to prepare for the future.
People are living longer and things are costing more (darn you Toronto housing market)!
It’s a good idea to start thinking about your retirement as soon as you can.
Many of us in our 20s don’t need to worry about mortgages or kids, so it’s much easier to put our extra funds into our retirement savings.
32% of Canadians aged 45 to 64 have almost nothing saved up for their retirement.
That’s not a position you want to be in when you’re close to retiring!
The better we all understand about the CPPIB and the CPP Fund, the better we’re able to help sustain it for our future children and their children.
Start saving for retirement in your 20s!
Everyone has different financial situations, but everyone also has to retire at some point.
While your 20s are a journey into adulthood and dare I say, a time to be selfish, they’re also a time to smarten up and figure out what the heck you want to do with your life.
Pay off that OSAP as soon as you can and avoid spending money on credit cards you don’t have.
Even saving a small amount from your paycheques and putting them into long-term investments will make a huge difference to your future!
How much should I save for retirement in my 20s?
The average Canadian retiree spends around $2,600 a month, compared to working Canadians who spend around $3,400.
If you plan on retiring exactly at 65 and let’s say you live until you’re 95, you’re going to need $936,000.
If the average retiree receives $8,000 yearly from CPP, that’s only $240,000 of the $936,000 you need.
So get to planning for retirement now, my friends!
Saving for retirement in your 20s is difficult between starter salaries and high living expenses, especially if you’re living in an expensive city like Toronto.
However, with proper planning, it is possible!
Did you learn anything new about the CPP and CPPIB? What are your tips on saving for retirement in your 20s? I’d love to know in the comments!
For more information about CPPIB, please visit their website.