How young people can save for retirement — starting now

Exposure to the stock market offers the most growth potential for those with time on their side

This may come as a shock. If you want to retire comfortably today, you’ll need to have about a million dollars in savings by the time you stop work.

Why so much? Do the math, says Larry Moser, divisional manager for BMO InvestorLine. A generation ago people would retire at age 65 and had a life expectancy of about 72. That’s only seven years in retirement.

Today it’s a much different story. More people are aiming to retire at a younger age, perhaps in their mid-fifties, and are living into their 80s. That’s 25 to 30 years in retirement. Unless you have a goldplated pension plan, you’ll need to save a lot more to finance the costs.

That’s why he suggests that young people start saving early — ideally as soon as they start work. Putting aside even a small amount of money every pay cheque can add up to a fat nest egg down the road.

Consider the case of a 25-year-old who wants to retire at 65. If she saves $100 bi-weekly in an RRSP and earns 6 per cent a year, she’ll have more than $433,000 in her plan at age 65. And that’s assuming she’ll never increase the payment. If she adds to her savings every time she gets a pay hike, she should easily exceed the million-dollar mark.

“The message is start early,” Moser says. “The more years your money is invested, the greater the advantage of compounding.”

But invest in what? With rates so low, he suggests avoiding interest-based securities like deposit accounts and GICs. Have some exposure to the stock market, which offers the most growth potential over time.

Yes, there will be ups and downs but young people have the time horizon to ride out any dips. He suggests a split of 75 per cent in equity-related securities and 25 per cent in fixed income, but the numbers can vary depending on a person’s risk tolerance.

Keep the money in a registered account to maximize returns — either an RRSP or a TFSA.

“You need to start with a plan — that’s number one,” he explains. “Why are you investing this money? Once you know that, you’ll have a clear idea how to proceed.”

For example, if you’re saving for retirement an RRSP is the best choice. You get an immediate tax refund plus long-term tax-free compounding.

If your goal is shorter term — a new car, saving for a mortgage down payment, etc. — use a Tax-Free Savings Account. There is no tax deduction but you can withdraw the money whenever it’s needed with no tax or penalty. Plus, any amount withdrawn is added back to your contribution limit in the following year.

Some people have dual goals — they want to put something aside for retirement but also save for the short term. In that case, there’s nothing wrong with using both plans.

If you don’t have a lot of investing experience, Moser suggests you start with ETFs or mutual funds that offer professional management and diversification.

Robo advisers, a new and rapidly growing segment of the wealth management industry, are especially popular with young people just starting out.

They invest mainly in ETFs (exchange traded funds). BMO offers such a service through it SmartFolio funds and there are several other choices available, including Wealthsimple, the largest robo adviser in Canada.

But where are young people supposed to find the money to invest? They may have student loans to pay off, a car loan to handle, or credit card debt.

You have to prioritize, says Moser. There is both good debt and bad debt.

An example of good debt is a mortgage because your home is an investment in the future. Bad debt is credit card interest. Most major cards charge an annual rate of about 20 per cent on outstanding balanc- es. That will tear apart anyone’s budget so people in that position should focus first on getting rid of that interest expense.

Student loans are more problematic. Some offer generous terms and may even be interest-free. No need to rush to pay off those. Others are more onerous. Look at your own situation and decide.

“It all comes down to the old say-

“It all comes down to the old saying: pay yourself first.” LARRY MOSER DIVISIONAL MANAGER FOR BMO INVESTORLINE

ing: pay yourself first,” Moser concludes. “Set up a continuous savings plan (CSP) at your bank and have some money deposited into it every payday, even a small amount. You’ll be amazed at how quickly it adds up.”