RRSP, TFSA beneficial to students, experts say
By Kelly Townsend
University and College students should consider saving for retirement sooner rather than later.
A CIBC poll released Thursday shows that only 25 per cent of Canadians 18-24 currently contribute to a regular investment plan for their retirement.
The poll also shows that 43 per cent of Canadians in the same age group plan to contribute to a Registered Retirement Savings Plan or a Tax-Free Savings Account in the next year. The number rises to 58 per cent for Canadians ages 25-34.
LISTEN: Financial expert Bruce Sellery on why compound interest matters to your RSP
Jamie Golombek, Managing Director, Tax and Estate Planning at CIBC says students should look into saving money as soon as they have the funds for it.
“Retirement may not be a top priority, but it’s important to look at saving generally for various goals, whether to buy a car or a first home or, ultimately, for retirement,” Golombek said.
“Our general advice for young people, including students, is that if you’re in the lowest tax bracket, under $40,000 a year, I would try to put any extra money I have into a TFSA,” he said. “It gives you flexibility.”
Humber Business Professor Steve Bang says opening a TFSA is more beneficial for low-income earning students, rather than regularly contributing to an RRSP.
“If a full-time student doesn’t earn at least $20,000 or more a year, there is no tax advantage for that student to put money in RRSPs,” Bang said.
“If they have extra money, they can put money in a TFSA. That would allow them to earn a return on their investment in interest without paying taxes.”
Consider financial goals, expert says
Bruce Sellery, a financial expert and columnist at MoneySense magazine, says that students should only put their money solely into a TFSA if their ultimate goal is to save money for a home or a car.
“If you don’t open an RRSP and instead open a TFSA, you can pull that money out and use it for anything, which doesn’t protect you from yourself,” Sellery said. “Most people need to protect themselves from themselves when it comes to retirement savings and a TFSA doesn’t do that.”
“You don’t want that flexibility, you want to deal with those challenges and those expenses in a different way.”
Sellery, whose book The Moolala Guide to Rockin’ Your RRSP was released this year, says that any RRSP contribution, even if it’s just $50 a month, is important in establishing the habit of saving money early.
“You have time on your side. The difference between starting to save when you’re 20 and starting to save when you’re 30 is enormous,” he said. “The reason for that is compound interest.”
“If you save just a little bit starting when you’re young and keep saving just a little bit, the way that will compound over time will give you an exponentially larger nest egg than if you start when you’re 10 years older.”
Golombek recommends that students or recent graduates who are just looking into saving for retirement should speak to a financial advisor.
“Especially at a young age, it’s great starting with a financial advisor who can look at your personal situation, look at any student debt that you have, also look at possible savings opportunities and put together a plan that works for the long term.”
For any students worried that they can’t afford to think in the long term, Golombek advises having contributions automatically taken off of their paycheque.
“If I don’t see it, then I don’t spend it,” he said.