How to Make a Retirement Plan to Retire Ritch

When you’re in your 20’s, I bet the last thing you want to think about is retirement. Not only is it depressing having to think about growing older, but also it can be incredibly overwhelming. Still, it’s something that has been on my mind ever since I started my journey out of debt.

From graduating University, leaving home, finding a partner, having kids, to becoming financially independent – 20-somethings my age seem to be doing everything a little later in life than the previous generation. So it makes sense that retirement might also happen later. But who wants to work past age 65?! Not me.

20-somethings are in the best position to begin saving for retirement. The more money you can save today, means the more money you will have in the future due to the magic of compound interest. Yet, it seems like very few of us are putting enough money into our RRSPs, if we’re even thinking about retirement at all.

Retirement as we know it today is based on the idea that you work for the majority of your life until you have accumulated enough money to quit your job and live off of your savings – typically in your mid 60’s. Seems simple, right? But what will retirement look like in 30-40 years? And will the traditional method of saving our income until our 60’s lead to a comfortable retirement? Or will Gen Y fall short of the mark?

Here are a few reasons why we might face difficulties staying on track with a retirement plan:

More debt upon graduation

According to the Canadian Council on Learning, the average tuition for a university undergraduate in 1990 was $1,464. But by 2010, that number had more than tripled to an average of $4,917. As a result of the increase in tuition, graduates who completed their programs in 2000 owed 68 per cent more than students who graduated in 1990.

The average debt load of university graduates in 2009 was $26,680 – which doesn’t include credit cards, lines of credit, car loans, or mortgages. And with a shortage of job opportunities for new graduates, it is easy to see why it can be hard for 20-somethings to begin their journey towards financial independence.

Higher cost of living

In most of Canada’s major cities, the age-old principle of purchasing a home no more than 2-3x your gross annual salary is not realistic. A January 2011 study done by the Frontier Centre for Public Policy showed that the median Vancouver home at $602,000 was 9.5 times the $63,100 median household income in the city. Meanwhile, the median Toronto home at $379,000 was sitting at 5.1 times the $74,800 median household income.

It’s not just housing that’s more expensive in comparison. It’s everything from the cost of fuel, to movie tickets, to groceries and clothing.

Not only do students have more debt upon graduation, and a higher cost of living, there are also other expenses that other generations didn’t have – such as cell phones, personal computers and internet access – all of which is considered essential in order to be competitive in today’s job market.

Less employers offering pensions & benefits

Many companies have stopped offering traditional pensions or medical benefits to new hires, or have significantly cut back on the plans that they offer. Since I entered the workforce five years ago, I have only worked for one company that offered an RRSP plan with a company match (four per cent). I have also been employed by companies that don’t offer a health benefits plan at all. Which means that everything from a visit to the dentist, to getting a prescription filled came out of my pocket.

Retirement cash-outs

Previous to 1992, the opportunity to borrow money penalty-free from your RRSPs was not an option. With the introduction of the Home Buyers’ Plan in 1992, an estimated two million people have borrowed more than $15 billion of their own RRSP savings to purchase a home.

The Lifelong Learning Plan, which was introduced in 1999, has seen an estimated 50,000 people borrow approximately $363 million since its inception.

While these programs are “penalty-free” as long as you repay the money back into RRSPs within 15 years, borrowers will end up losing tens of thousands of dollars in potential tax-deferred growth if they take the entire 15 year period.

More opportunities & accessibility

The world is much more accessible than it once was. Many young adults are finding opportunities abroad that just weren’t widely available 10 or 20 years ago, such as teaching English in Asia, volunteering in third-world countries, or spending a year traveling. These opportunities tend to mean that 20-somethings will take that much longer graduating from university, getting into the work force, and finding their way out of debt.

Travel and exploration aside, 20 years ago, there weren’t iPads, smart phones, flat screen TVs, video game consoles, or DVD movies to buy. What’s more, we don’t even need to leave the comfort of our own home to buy anything. Late at night, or on a rainy day, with a click of a mouse, we can buy whatever we want – which does nothing to curb impulse shopping.

Longer life expectancy

It’s no surprise that we are living longer than ever. In 1970, the average life expectancy of a person Canada was 72.7 years. In 2009, that number jumped to 81.2 years on average. While that might not seem like a lot, it means a lot more savings is needed in order to finance almost 10 more years of life expectancy. And of course, those are just averages. There is a significant possibility that the 20-somethings of today will live well into their 90’s and beyond.

Have you started saving towards your future?