Saving up for retirement when you’re in your 20s or just recently graduated from University can seem a little overbearing, and ridiculous. The benefit of starting to save early in any avenue, however, is continuously overlooked. With investing your money anywhere, time is your most valuable asset, and that includes saving for retirement.
According to data from Charles Schwab, an 18-year old investing $100 per month and earning a rate of return will accumulate $307,000 by 65. However, if they wait to start investing until 40, they will only have $70,000. Pretty crazy difference, right? This statistic illustrates the power of time when investing your money very well. If you start off young, you can reap the benefits of compound interest, which accumulates over time. Compound interest is interest that adds up every year, so the amount you earned from interest last year will be added to your total amount of money, on which you’ll earn more interest, and so on. Over time, that can really add up.
If saving even a small amount is within your means, and it is something that you can work into your budget, then it really is something to look into. With that being said, it is important to not neglect other financial priorities or responsibilities, such as saving for an emergency fund, or paying off credit card debt. Only allocate money towards a retirement fund if and when you can afford it.
RRSP
In Canada, a Registered Retirement Savings Plan, or RRSP, is a financial account for retirement savings and acts as an investment vehicle for employees. In this account, investments will compound without being taxed; pre-tax money grows tax-free until withdrawal. An advantage of investing in a RRSP is any money invested up to the yearly limit will reduce your taxable income for that year, and individuals may deduct contributions against their income.
According to the Canada Revenue Agency, the RRSP contribution limit in 2020 is 18% of an individual’s earned income, up to a maximum of $27,230. To set up an RRSP, you have to do so through a bank, credit union, or insurance company, and there are different types of accounts that you can set up depending on your individual financial and personal situation (Government of Canada).
While it may not seem like a glamorous thing to save for retirement at age 20, it’s one of those things that will greatly benefit you in the long run. Making sacrifices now, earlier on, will really set you up for financial independence down the road, and it’s something that you’ll thank yourself for, years from now.