When should you get serious about saving and investing?
When is it time to get serious about saving and investing? I’m always amused when I hear tales from financial advisors about recently landed clients with unrealistic expectations about what financial planning can do for them. Let’s face it, if you’re 63 years old, have no employer pension plan and have saved nothing or are still in debt, there’s no magic wand an advisor can wave to permit you to retire in luxury at 65. You’ll qualify for Old Age Security (OAS) and, depending on your employment track record, the Canada Pension Plan (CPP). If the latter is spotty, then you may also get the Guaranteed Income Supplement (GIS) to the OAS and that’s about it.
Financial institutions have conducted several studies that find one of the biggest regrets of older folk is not having begun to save earlier in life. Looked at from the perspective of the time value of money and the power of compounding, the best time to start saving is the moment you enter the full-time permanent workforce. I urge any young person who has reached the age of 18 to get started saving and investing in a tax free savings account (TFSA), even if they have to tap the Bank of Mum and Dad to get started. The BOMAD could bribe the kids by promising to match any contributions.
For example, if Junior can come up with $2,750 from some combination of summer and part-time jobs, then the BOMAD could add another $2,750, thereby maxing out the annual $5,500 TFSA contribution permitted. Do that for 30 or 40 years and you won’t have to worry about having enough money to retire. Of course, if the kids are bent on higher education, long before they grow up, the BOMAD should be contributing at least $2,500 a year to a Registered Education Savings Plan (RESP), which offers a guaranteed 23% return with no risk or fees, observes Chris Cottier, a Vancouver-based investment advisor with Richardson GMP Limited.
When did I start to save? Well, blush, of course they didn’t have the TFSA when I was a young investor. The truth is I hadn’t saved a penny till I was 31 and only started my RRSP when I commuted the value of a defined benefit pension plan I had been in for four years. So technically, via the forced savings of a company pension plan, I could claim to have been saving on a regular basis since I was 27.
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This did not turn out to be too late to have begun saving, though like survey participants, I wish I’d begun five years earlier. But my relatively late start was no disaster and indeed many financial experts, such as retired actuary Malcolm Hamilton, have suggested there’s no real need to worry about investing in the stock market if you still have debts to pay off.
Mr. Cottier is in the same camp with respect to TFSAs, particularly the variety that hold only investments that generate minuscule amounts of interest income. Better to pay off high-interest credit-card debt first, Cottier points out, since few investments can match the return of wiping out 18% credit-card debt. That’s 18% after tax, the equivalent of a pre-tax return of 29%, he says.
Where it gets tricky is mortgage debt. With the skyhigh prices of homes in Canadian cities like Vancouver or Toronto, I can sympathize with young people trying to get their first step on the housing ladder.
But I still think a TFSA is a good thing to begin at age 18. Use it first to come up with a down payment on a home. Once that’s done, you could put new contributions on hold until you paid down a good chunk of the mortgage. If you have an employer pension, you’d at least be contributing to that and could take comfort that via that pension you at least have some stock-market exposure. And of course, if you’re employed, you’d also be contributing automatically to CPP.
What about RRSPs? If you have a good workplace pension, you won’t have much RRSP room anyway. If married and your spouse works and both of you are in the top tax bracket, you should be able to afford to maximize annual RRSP contributions. If living on a single smaller income, you can dispense with both the RRSP and TFSA until all credit-card debt is eliminated and possibly the mortgage is well on the way to being paid off.
To return to the question posed at the outset, you should aim to have all debts, including mortgage, paid off by your mid-40s. By then, you’ll have been used to making large mortgage payments; once they’re gone you can divert a similar amount of money into maxing out your RRSP and TFSA contributions and perhaps add a bit to non-registered savings. With a 20-year run to age 65 or 67 (remember, for younger folk, OAS won’t start until 67), you’ll still have plenty of time to “get serious” about saving.
Jonathan Chevreau, Special to Financial Post- 08.Nov.2014
