I was 19 years old when I started saving for retirement. A small portion of every paycheque went into my RRSP, starting with $50 every two weeks and eventually increasing that amount to $200 per month.

While my intentions were in the right place, the reality is that putting retirement savings ahead of a multitude of short-term goals (many of which had yet to be identified) was a big mistake. Here’s why:

No short-term goals

It’s good practice to save a portion of your income for the future, even at a young age. The problem for me was that I was still in school and didn’t have a plan – I had no clue what I was saving for.

Related: The battle between your present and future self

I had read The Wealthy Barber and The Millionaire Next Door and so I knew the earlier I started putting away money for retirement, the longer I’d have compound interest working on my side, and the bigger my nest egg would be.

Unfortunately, I was saving for retirement at the expense of any other short term goals, like paying off my student loans, getting married, taking a trip, buying a used car, or saving for a down payment on a house.

No short-term savings to fund those goals

Was an RRSP really the best savings vehicle for a 19-year-old who was making less than $20,000 a year part-time while going to school?

There were no real tax advantages to saving within an RRSP when I was in such a low tax bracket. I had tuition credits, and besides, I’m sure I blew my tax refunds anyway, so what was the point?

Granted, the tax free savings account hadn’t been introduced yet, but I would have been better off using a high interest savings account for my savings rather than blindly shoving money into my RRSP.

No clue about fees and tracking performance

Like a typical novice investor I used mutual funds to build my investment portfolio. I was encouraged by a bank-advisor to select a global equity mutual fund because, as I was told, it would deliver the highest returns over the long term.

Related: Canadian mutual funds – A steep price for underperformance

What the bank advisor didn’t tell me was that the management expense ratio (MER) on some of those mutual funds can be 2.5 percent or more, and high fees would have a negative impact on my investment returns over the long run.

The bank advisor also didn’t tell me which benchmark the mutual fund was supposed to track (and attempt to beat) so whenever I got my statement in the mail it was impossible to determine how well my investments were performing compared to the rest of the market.

No choice but to sell

I didn’t have a good handle on my finances in my 20’s and often resorted to using credit cards to get by. With no budget or plan in place, and without any short-term savings to fall back on in case of emergency, I had no choice but to raid my RRSPs to pay off my credit card debt and get my finances back on track.

Taking money out of my RRSP early meant paying taxes up front. So when I withdrew $10,000 from my RRSP, the bank withheld $2,000 and I was left with $8,000. In addition to the withholding tax, I also had to report the full $10,000 withdrawal as taxable income that year.

Related: The beginner’s guide to RRSPs

While I can’t argue with my reasons for selling – raiding RRSP funds to pay off high interest debt wasn’t a horrible move – my dumb decisions beforehand cost me a lot of money and left me starting over from scratch.

Even worse, according to a CBC poll, is the 14 percent of Canadians who raided their RRSP to cover day-to-day living expenses and the 6 percent who took money out to pay for a vacation.

Final thoughts

If I could start over again today I would take these four steps before deciding to save for retirement:

1. Create a budget – A budget is the foundation for responsible money management. Had I used a budget and tracked my expenses properly from an early age it’s more likely that I would have lived within my means and kept my spending under control.

2. Open a tax free savings account – Yes, the TFSA wasn’t around back then but for today’s youth it makes much more sense to save within your TFSA instead of your RRSP like I did.  You can put up to $5,500 per year inside your TFSA and withdraw the money tax-free. You contribute with after-tax dollars, so you won’t get a tax refund, but you’ll likely be in a low tax bracket anyway, so contributing to an RRSP won’t give you much of a refund either.

3. Make a financial plan – We all have financial goals and even at a young age I should have identified some short-and-long term priorities to save toward. I’d take a three-pronged approach where I’d use a high interest savings account to fund my short term goals, my TFSA to fund mid-to-long term goals, and eventually open an RRSP to save for retirement. No doubt I’d be much further ahead today if I took this approach earlier in life.

4. Use index funds or ETFs – Now that I understand how destructive high fees can be to a portfolio, I’d want to build up my investments using low cost index funds or ETFs. The advantage to using index funds like TD e-Series is that you can make regular contributions at no cost while achieving market returns, minus a small fee. Some brokers also offer free commissions when you purchase ETFs, which can lower your costs even further.

There’s nothing wrong with saving for retirement at a young age – it’s important to save and retirement has to become a priority at some point in our lives. But we also need a financial plan to make sure we’re saving with a purpose, prioritizing our goals, and striking the right balance between our short and long term goals.

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10 Comments

  1. Daniel on February 21, 2016 at 12:12 pm

    Good article, would have been useful when I was younger :). What would you say to someone like I know who is 40 years old with high credit / loan debt but still has a modest RRSP account with regular contributions? Withdraw to pay off the credit debt? Is it too late to build the RRSP back up now if she did that, considering a possible retirement age of 65?

    • Echo on February 21, 2016 at 1:18 pm

      Hi Daniel, it’s tough to say without knowing the complete financial picture. I’d want to focus on why this individual is carrying high interest debt in the first place. Is there a cashflow problem? Can she get a handle on her monthly expenses?

      At the very least I’d suggest putting a halt to regular RRSP contributions until the debt is taken care of and behaviour changed. If the debt is significant, it might be worth dipping into RRSP savings to pay it off. Again, that’s tough to say without knowing all the details.

      At 40 years old it’s certainly not to late to turn this situation around and retire by 65.

  2. Garth on February 21, 2016 at 12:46 pm

    Well said Robb. Pretty hard to get most young folks to get excited about saving for retirement which seems so very far away. Perhaps a better goal for young savers is to put money aside to give yourself choices in the future. This could include anything from a down payment on a house, or going back to school, or taking a sabbatical, or having the security to walk away from a bad job, etc. Choices are good.

    The key is to get into the savings habit, to increase the amounts over time, and to invest at low cost.

    • Echo on February 21, 2016 at 1:23 pm

      Hi Garth, at the end of the day it’s great to have options. Having cash on hand means you can take some risks and make the difficult decisions easier, especially when you’re young. Locking up all of your savings inside an RRSP, like I did when I was younger, limits those options.

      I like what you said about getting into the habit of saving. It’s still important to save, it’s just that saving for retirement maybe shouldn’t be priority number one until you have a well established financial plan.

      • Garth on February 21, 2016 at 4:30 pm

        Nothing like having a healthy nest egg for freedom and flexibility….and some day retirement will be one of your many options.

  3. NZ Muse on February 21, 2016 at 3:30 pm

    I do feel like PF tends to overemphasise retirement savings. Don’t get me wrong I think most people need that message! But there are nuances. And for me in the NZ housing market, in particular.

  4. Lynn Meyer on February 22, 2016 at 9:25 am

    I used my the RRSP from my first real job to pay for most of my law school education, the best use of that money that I can imagine. I ended up being able to withdraw the money tax-free, and was able to get a much better paying job in the end. I think I came out ahead despite the loss of compounding my initial savings.

  5. Our Next Life on February 22, 2016 at 1:28 pm

    If you plan to work until 65, then great! Put your money into your retirement account from a young age, at least after you save for whatever housing situation you plan to have. But for those of us planning to retire early, it’s super important to have unrestricted funds available to cover the “bridge years” between quitting and getting to the age when you can access traditional retirement funds (401k in our case, in the U.S.). We did a good job saving in our 401ks when we were young, and now, in our mid-30s, can basically stop contributing to those if we want to. But we have a ways to go in our taxable accounts. So our advice to those who ask us is: save as much as you can in unrestricted, taxable funds! Then that money can cover anything, not just retirement.

  6. Stockbeard on February 22, 2016 at 5:07 pm

    I think it’s better to make the mistakes earlier than later. Sure, you could have done less mistakes in your twenties, but clearly those mistakes have led to some action and learnings on your end.
    I’ve made an expensive mistake in my early thirties, and that mistake was the one that led me to understanding my finances much more precisely than I did back then. I can now see that I am way ahead of most of my friends and family when it comes to understanding personal finance

  7. My Own Advisor on February 24, 2016 at 8:45 am

    Smart stuff Robb. Definitely agree with #3 before #4, plan before products whenever possible. You (and I) of course didn’t know these things at age 19 though! 🙂

    Mark

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