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The power of saving and investing early cannot be overstated. It’s the most powerful financial action a young person can take.
Getting your children on this bandwagon early is the most valuable piece of financial advice you can give them. And you don’t need to be a financial whiz to do so.
Your teenager is not going to dedicate any thought whatsoever to saving for retirement. And they shouldn’t – that’s a bit ridiculous considering they haven’t even started their first full-time job.
Let’s get real: Young people have a lot of things they need to save up for, including college or university education, a first car, funds to move out of their parent’s house, or a down payment on a house or condo. These are important things to save for – it’s how we grow and advance in our lives.
But saving for long-term goals – whether you want to call it retirement or just “later in life” money – should always be there alongside these other objectives, because for most people, starting early is what makes it possible to save enough.
Charting Retirement: Your retirement savings target is probably lower than you think
Many of my clients tell me that they wish they had started saving earlier in life. Most of them had never been told about the incredible power of time and compounding.
I was lucky because my first job was with a bank, where I was encouraged to get customers to sign up for an automatic purchase plan into mutual funds. I had one, too, and also had a group RRSP and a stock purchase plan. My savings came off my paycheque. Thirty years later those savings are still growing.
Saving for retirement is the biggest, most overwhelming savings goal there is, but for many people, it is achievable with good saving habits. While it is impossible to come up with a definitive number for how much your children will need to save for retirement because there are so many factors that go into this calculation, it’s fair to say that the number is at least a $1.5-million – and this is a lowball estimate.
Let’s look at the example of $1.5-million – the concept is the same regardless of what the end goal is. There are many ways to get there. One way is to start small, putting away $50 a month from ages 16 to 22, then increasing it to $300 a month from ages 23 to 30, and $700 from age 31 to 64.
On the other hand, if you wait until age 40 to start saving, you will need to put away $2,200 a month until age 64. This means the late starter has to put away more than the early saver – much more.
The early saver only needs to put in about $320,000, while the late starter has to contribute $634,000, a difference of $314,000. That’s a lot of extra dollars you could be spending on something else.
(For our example, the $1.5-million figure is calculated assuming an average annual return of 7 per cent and that investment income is not taxed over this period.)
To make it tangible, have your teenager play around with an online savings growth calculator, or they can ask AI to do the math for them by giving specific instructions about different savings amounts at different ages. Seeing how money grows over long time periods pictured on a graph is truly inspiring.
As soon as your teenager hits the age of majority in your province – which is 18 or 19 – have them open a tax-free savings account (TFSA) and put their accumulated savings in there. When they start working full-time, a registered retirement savings plan (RRSP) comes into play. And they should always take advantage of any employer savings plans that offer a matching component.
Starting early with saving isn’t just about the power of time and compounding. It has other benefits too. Saving feels good. Knowing you have money set aside creates a sense of being financially responsible. And that inspires more of that kind of feel-good behaviour. In my experience as a financial planner, people who are good savers also tend to be more in control of their spending, and have no outstanding credit card debt. It’s a positive reinforcement loop.
Be the person who tells your kids about the power of time and compounding. Thirty years from now, they’ll thank you.
Anita Bruinsma is a Toronto-based certified financial planner and a parent of two teenage boys. You can find her at Clarity Personal Finance.
