The key to successful retirement planning: Pay yourself first
By: Susan Lazaruk
Financial planners advise millennials to start saving for the future as early as possible and 27-year-old Chelsea Sweeney, who teaches English as a second language, feels that pressure.
“I do think about my retirement and I do think about my future and it’s something I do worry about a lot because it’s difficult to kind of get started or to know where to start when you’re in your 20s,” said Sweeney at the University of B.C., where she also takes a few courses after graduating with a degree in classical archeology and English literature.
What are the top five strategies for millennials — those born between 1977 and 1995 and are 22 to 40 years old this year?
“Well, actually, there’s only one and it’s not a secret,” said Chris Catliff, president and CEO of BlueShore Financial, a credit union based in North Vancouver that specializes in wealth management. “It’s actually in every self-help book you see out there. And in my 30 years’ experience in looking at high-worth individuals, they all follow it, and it’s very simple: It’s pay yourself first.”
He said it’s important to commit to “forced savings” as early as you can, especially since company pension plans are less common or less rich.
“(Saving) 10 per cent (of your gross earnings) is incredibly smart for your life and 15 (per cent), you’re a genius,” he said.
Sweeney’s goal is to eventually be a teacher and archaeologist and work full time so that she can save money to put a down payment on a house.
“Home ownership is important to me because that is tied to my security in my older age,” said Sweeney, who watched her parents’ savings evaporate in the 2008 global economic meltdown.
She said she plans to continue working into her 70s and even her 80s, as she has seen archeologists doing on a recent trip to England.
“That’s what I want to when I’m older, I still want to be a productive member of society,” said Sweeney, who is single and as yet has no children. “I don’t see myself officially retiring at 65 or 67. I just want to continue doing what I love to do. That’s my plan.”
But, like her parents did years ago when they moved to the more affordable Kootenays from Metro Vancouver, Sweeney predicts the only place she will be able to afford to buy is up the coast or on Vancouver Island.
But getting a degree was important to her for her long-term plans and she realizes that means a delay in earnings, savings and a mortgage.
“My friends in the Kootenays have a house, a mortgage and full-time work,” she said. “And my friends who have gone to university are still struggling.”
Sweeney has only a small student loan and no credit card debt or a line of credit but cashed out her registered retirement savings plan and has managed to save only small amount in a tax-free savings account.
Young people with debt should try to pay off their loans and save for retirement at the same time, but any high-interest debt should be paid down first, said Catliff.
“If you don’t do that, you may be doing one step forward with your RSP but three steps back with your debt,” he said. “What’s really important is to take care of all credit card debt, that’s evil, that has very, very high percentage (interest rates).”
But the sooner millennials start, the better, to take advantage of compounding interest.
“If you take two twins and the first twin started when she was 25 and paid a certain amount into her RSP so that at 54 she had enough for retirement, and the second twin started at 35, she would have to pay double what the first twin did (to retire at the same age),” he said.
As to whether it’s better to save within a TFSA or an RSP, Catliff said: “The smart answer is do your RSP and the use the refund to contribute to your TFSA. If you started the TFSA right at the beginning, you would have at least $52,000 of room.”
Catliff also advised millennials to take advantage of the homebuyer purchaser plan, which allows first-time buyers to borrow up to $25,000 from their RSPs with no interest or penalty as long as they pay it back within 15 years, and the new B.C. home ownership program, through which first-timers can secure up to $37,500 for a down payment (to match their own) that remains interest-free for five years.
“So that’s a big nest egg,” said Catliff.
He said 40 per cent of B.C. homebuyers get help from family, and the figure is higher in the Vancouver area.
“Ideally you want to do it (get a down payment) on your own but if you do need help from your parents, maybe one thing to do is living at home a little longer,” he said. “When you do that rent-free, save for your mortgage payment and show that you’re saving for your mortgage payment. If you can’t do that, maybe you’re not ready for your actual home.”
Sweeney said that’s not an option for her but the message that it’s never too early to think about putting away in her 20s for later economic security isn’t lost on her.
“The smart thing is to always look ahead and is the best way to protect yourself in this economic climate,” she said.
Read the full article here: http://vancouversun.com/business/local-business/how-to-navigate-rrsp-season