A recent report shows that millennials are leading the pack when it comes to investing in their retirement.
According to an annual BMO study, millennials’ contributions to their RRSPs has jumped by 87 per cent since 2016. Millennials accounted for the highest percentage increase compared to baby boomers, who saw a 30 per cent increase over the same time period.
RRSP deadline approaching
“We’re seeing a huge pickup in what millennials are saving in their RRSPs,” said Robert Armstrong, director of BMO Global Asset Management. “As [millennials] progress in their career, up the tax bracket, up the salary bracket, then that RRSP becomes a much more important part of their long-term planning.”
Armstrong adds that the bigger picture shows millennials are split between tax-free savings accounts (TSFA) — where money can be taken out at any time — and RRSPs.
“The baby boomers are preferring the TSFA right now over the RRSP,” Armstrong said. “For millennials, it comes down to where you are in your career progression. A lot of them are getting through their student loans, and they’re at the point now where they can actually start contributing to their RRSPs,” Armstrong said.
While the difference between the two can be hard to navigate, Armstrong says TSFAs are easy to understand and can be taken out at any time.
“You can put your money in, when you retire you can take it out. There’s no taxes on the way in or taxes on the way out,” Armstrong explained.
“For RRSPs, it’s a bit more complicated because you want to make sure when you put money in you’re in a higher tax bracket than you will be when you take the money out.”
Armstrong explains that’s because you can take the RRSP deduction off your taxes, meaning you get a tax refund when you make an RRSP contribution. But, at the same time, you have to pay tax when you withdraw.
While both options are available to everyone, an Ipsos poll shows that nearly half of Canadians are within $200 of not being able to pay their bills or debt at the end of the month.
But Tanis Ell, a credit counsellor with the Credit Counselling Society, says even those struggling to make ends meet can start building a financial nest egg.
“Even if you contribute $25, $50, $100 or $1,000, you have to start somewhere,” Ell said. “The average Canadian has a car payment of $570. If a 25-year-old decided they were just going to have a used car and not have a car payment — but invest that $570 in a mutual fund or index fund that has an 11 per cent return — when they retire at 65, they would have $4.2 million.”
Ell adds that more millennials are seeking financial advice in order to get to a place where they can start saving.
“Right now, about 22 per cent of our clients are millennials,” Ell said. “Oftentimes, their concern is that they don’t have enough money to manage their expenses and (are) using credit excessively.”
Ell says the best advice is to sit down with an expert who can help you navigate your financial future.
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