Starting retirement investments early is key, says MRU professor
With students heading back to university this fall facing increasing costs and expenses, saving up for retirement may likely be the last thing on their mind. Though it shouldn’t be, says a finance professor at Mount Royal University.
Retirement savings should be started as early as possible, says Jim Fischer, chair and associate professor of finance at the Bissett School of Business at MRU.
Saving money now will earn you more from interest in the long run, Fischer says. Inflation will also add more value to your money in the future. Plus, saving early will give you more time to recover from any investment losses, he says.
“You have to look at the value of money in the long term,” Fischer says.
Yet a 2012 study by the BMO Wealth Institute showed that only 10 per cent of young adults (age 18-34) have thought critically about their retirement nest egg, and only five per cent have “thought a lot about how long they might be retired for.”
Alberta saw a $7 increase in undergraduate tuition fees between the 2011/2012 and 2012/2013 academic year. There is currently a tuition fee freeze for all post-secondary institutions in Alberta.
Illustration by Pauline Zulueta
But with the student loan debt in Canada currently over $15 billion according the Canadian Federation of Students, and the average student graduating with $26,297 worth of debt, finding the money for retirement savings can be challenging.
Furthermore, it can also be hard to accurately predict how much you need for retirement and how long you will be retired for because there are too many variables. Starting a family, career changes or sudden disability may alter financial plans along the way, Fischer says.
“You don’t really know the specifics in the end, but you can generally plan early,” he says.
Get a head start
The key is to start saving for retirement early and to budget your expenses, Fischer says.
He says budgeting will allow you take a closer look at your expenses and help you determine how much you can contribute to your retirement savings. Even with regular payments and expenses, it’s still important to contribute a little amount, Fischer says.
Carley Egan, 23, has had a Registered Retirement Savings Plan since she was 18 years old. Over the span of five years, she has opened a total of 11 savings accounts, which includes an emergency car fund, a vacation fund and a wedding fund.
“It’s all about planning for the future,” Egan says. “If I didn’t put money away, it would be spent and there would be nothing [for savings].”
Egan currently contributes $500 a month to her retirement savings account. Her goal is to have $1.4 million for retirement by the age of 65. She says she envisions a simple, comfortable retirement lifestyle.
“I think everyone should be putting something away. Even if it’s just $100. You’re still adding to the pot,” Egan says. “The earlier you save, the more money you’ll save. The later you start, the more money you’ll have to put in, and the more money you’re sacrificing.”
She says that while it can be hard to manage a budget, saving for emergency funds and forecasting future expenses will protect long-term savings funds such as RRSPs.
Get informed
Fischer also says that an important step to retirement planning is just to get educated about it.
“Get versed on options that are out there,” Fischer says. “It’s good to be financially literate about the basics.”
The 2013 BMO Student Survey revealed that women are graduating with an average of $7,745 more student loan debt than men.
Illustration by Pauline ZuluetaOther common sources for retirement savings include pension plans with your employer,
investments and the Canada Pension Plan.
Egan says she did previous research and planning when she started her retirement planning.
“It’s unbelievable how much you need to save in order to get that kind of money. It’s definitely a goal that you need to work at for a long time. It’s not something that you can just work at for 10 years and then retire,” Egan says.
Practice smart spending
In order to ensure continuous growth in retirement savings, it is best to keep your consumer debt down, Fischer says. Consumer debt means the money owed from purchasing consumable, non-appreciating goods.
Fischer says, “Consumer debt is extremely expensive. It makes no sense to be paying 20 per cent interest on a credit card and at the same time, put away long-term savings that may yield you only three or four per cent.”
Therefore, he advises that it is crucial to curb illogical spending and impulse buying habits so that consumer debt does not prevent you from contributing to your savings.
“Satisfy needs first, then wants second. And long-term retirement planning should be a need,” Fischer says.
Juan Arciniegas, mutual funds representative at Scotiabank says, “The goal is to retire without debt.”
“It’s all about planning for the future. If I didn’t put money away, it would be spent and there would be nothing (for savings).”
— Carley Egan
Arciniegas says that everyone has their own goal and picture in mind for what they would like to save for retirement. But generally, 10 per cent of your monthly income should be put towards retirement savings, he says.
Fischer adds that a good rule of thumb is to retire on at least 70 per cent of your current income if you’re comfortable with your current lifestyle.
But ultimately, the next key step is to actually take action and begin your retirement savings.
Fischer says, “Go into the bank and say you’d like to talk to a financial advisor. Just tell them what you want to do.”