Current popular opinion is to put off retirement savings until later years when all debts are paid off and family responsibilities are reduced.  Then, when you reach your prime earning years between ages 45 and 65 you can start seriously saving and catch up.

What do you see in your crystal ball?

The prime earning years, unfortunately, can also be the prime years of suffering a disability, serious illness, or even job loss.  Instead of living in a high-income bracket you could be on disability payments, or working at a lower salary, or otherwise unable to put aside any money for the future.

Retirement Savings

Starting young is best

A better approach is to save as much as possible starting in your 20’s when the money has the longest time to grow.

Related: The best time to start saving is now

You may have reduced contributions the first few years, but if you stay invested for the long term and keep making regular contributions you’ll eventually be in a better position to withstand job losses or other interruptions to your ability to save.

If those setbacks don’t happen you’ll have the option of retiring earlier if you want.

If your company has a retirement/pension plan and they match your contributions it’s a no-brainer to take advantage of it, even if you don’t think you’ll stay with them long.  That is what I thought, and I’ve regretted my decision ever since.

Don’t underestimate the power of long term compounding.  It works in your favor.  Due to decreased income, I stopped making RRSP contributions about twelve years ago.  This is not to say I neglected my portfolio during this time.  I changed some of my holdings, re-invested dividends, and even made a few withdrawals and my balance today has still increased over 320% from the date of my last contribution.

Paying debts first

Should you pay high interest credit cards off first?  You should do what you can to reduce these interest costs but if you wait until you pay off all your debts before saving for retirement, and then never manage to pay it all off, one day it will be time to retire and you will be completely unprepared – and, perhaps still in debt.

High interest credit card balances should be dealt with as soon as possible, but what about your mortgage?

I don’t understand the current mania to pay off a mortgage in 10 years or less when mortgage interest rates have been the lowest they’ve ever been for several years now.

If you pay off your debts while simultaneously saving for retirement you’ll end up on stronger footing than you would otherwise be.

The cost of waiting

While it’s never too late to start saving for retirement, putting it off too long can take a big bite out of your nest egg – or your monthly income.  People have the idea that you can put off retirement savings and somehow catch up later.  Catching up though can become increasingly difficult the longer you wait.

Related: What are you saving for, anyway?

Maybe, once the kids have left home to start their own lives and your mortgage is just about paid off, you might want to spend a little more on luxury grocery items, entertainment and new hobbies that interest you, rather than putting every penny of discretionary income into savings.

Final thoughts

It’s becoming increasingly necessary for people to take responsibility for their future retirement needs as well as managing their current financial needs.

A retirement plan should be as much a part of your budget as your mortgage or rent payment, cell phone and auto expenses, whatever your age.

Remember, if you plan to start later, later may never arrive.

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10 Comments

  1. Potato on April 30, 2014 at 5:30 am

    “If your company has a retirement/pension plan and they match your contributions it’s a no-brainer to take advantage of it, even if you don’t think you’ll stay with them long. That is what I thought, and I’ve regretted my decision ever since.

    What are you trying to say here? You regretted contributing to an RRSP with a matched contribution? What is it you regretted? It seems like that sentence maybe got moved from somewhere else?

    • Boomer on April 30, 2014 at 7:36 am

      @Potato: “Even if you don’t think you’ll stay with them long. That’s what I thought.” I regret not contributing to my company’s pension plan. It was optional at that time for women.

  2. Rick Manjin on April 30, 2014 at 7:04 am

    My 28 year old daughter in the last 5 years has maxed out her TFSA’s and RRSP’s.

    She currently has about $77,400 in RRSP’s and TFSA’s plus $11,000 in her savings account, cashable GIC. She is pretty conservative with her investments.

    She is determined to save about $14,000 a year as she has for the last 5 years.

    If she can stick with her long term plan and achieve her 5.00% annual interest before compounding which she did for the last 5 years then she will have about $2,400,000 by the time she retires at 65.

    • Boomer on April 30, 2014 at 7:40 am

      @Rick Manjin: It’s great hearing about a good young saver. Hopefully, she’s also maintaining a balance in her life between saving and living.

      I bet she learned her good habits from you.

      • Rick Manjin on April 30, 2014 at 9:39 am

        Thanks, Boomer for your kind words. She does have a pretty balance life by taking at least 1 week of vacation time every 6 months from her current job.

        She will be getting a $2,400 raise on June-1-2014 after 3 years of no salary increase.

        She no consumer debts, car payments, car loans, credit card, furniture loans etc.

        This will give her even more financial flexibility with the fun stuff in life.

      • Rick Manjin on April 30, 2014 at 9:42 am

        Correction, I forgot to put the word has no consumer debts…..

    • Elizabeth on May 4, 2014 at 6:06 am

      Wow! That’s fantastic!

      Just of out curiosity, how does home ownership fit in to her plans? I’ve saved up a downpayment for the size of a place I want to buy, but I sometimes wonder if I should have invested that money instead. (or if I should do so now…)

      I’m being nosey 😉 I’m actually quite happy renting for the moment and saving the difference between rent and the all-in cost of owning a place.

  3. Dan @ Our Big Fat Wallet on April 30, 2014 at 7:58 am

    We have a 3 year fixed mortgage at 2.60%. With rates as low as they are now, many people are better off putting money in their RRSP, TFSA or both. I’ve run the numbers for our situation and it just doesnt make sense for extra mortgage payments to take priority over retirement savings

    • Rick Manjin on April 30, 2014 at 9:49 am

      Dan, good observations but you may want to build up your liquid or short term safe money pile first in case you have a bump along the financial road of life.

      A good idea is probably to have 6 months to 1 year of living expenses in safe money like higher interest savings account, redeemable or cashable GIC’s, term deposits etc.

      • Dan @ Our Big Fat Wallet on April 30, 2014 at 1:35 pm

        @Rick good point. We have about 3-4 months of expenses in a savings account and are working (slowly) at building it up

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