Canada’s Registered Retirement Savings Plan (RRSP) helps Canadians begin saving for retirement. Anyone can open an RRSP account, as long as they are a Canadian citizen with Canadian employment income, file tax returns, and have a valid Social Insurance Number. Students can set up an RRSP through a bank, credit union, or insurance company.
You can begin saving at any age, but once you reach the age of 71, the RRSP account must be closed in December of that year. On the occasion of turning 71, you are offered to choose to either withdraw your savings, transfer them to a Registered Retirement Income Fund, or use them to purchase an annuity.
The benefits to starting now
You can begin investing in an RRSP at any age. You can invest with cash, mutual funds, savings accounts, securities listed on designated stock exchanges, guaranteed investment certificates, government and corporate savings bonds, and exchange-traded funds.
As a student, investing in a retirement savings plan early can prove to have long-term benefits like tax-deductible contributions. This means that the amount you put into your RRSP for the year is deducted from your taxable yearly income. Further, investments are tax-deferred, which means that taxes on the growth of your investments are not paid until you withdraw the funds from your RRSP account.
A common question students may have is whether they should invest in a Tax-Free Savings Account (TFSA) or in an RRSP. Both are tax-sheltered investment vehicles, but are meant to serve different purposes.
There is more flexibility with TFSAs, because you can invest and withdraw money from them whenever you wish and the gains on your investment are not taxed. You can only contribute $6,000 to a TFSA every year, and if you contribute less, that amount is added to your eligible contribution limit for the next year. An RRSP, on the other hand, is meant to be for retirement savings only and you cannot easily remove money from it. Contributions to an RRSP are tax-deductible, but contributions to a TFSA are not.
The idea of saving for retirement while having to pay outstanding debts like credit card statements or mortgages can be overwhelming. Everyone has a different financial scenario and students must evaluate what works best for them, even if it means only putting small amounts of money aside in their RRSP every month.
Challenges to retiring in Canada
A study recently found that different generations begin investing in their retirement savings at different ages. One part of the study that was particularly interesting was that Gen Z was found to begin contributing to their retirement savings around the age of 19, millennials at age 25, and Gen X at age 30. It appears that starting to save at a younger age has been a message that has trickled down across generations, since the oldest members of Gen Z are only 24 years old. Gen X and baby boomers have been found to contribute an average of 14 to 15 per cent of their income into their retirement fund, while Gen Z and millennials invest, on average, 16 per cent of their income in their retirement savings.
Despite the fact that this difference signals a positive change in financial literacy for younger generations, much of this is fuelled by the increased anxiety surrounding the possibility of a retirement crisis. As costs of living increase, research has found that many households will need to continue working past the age of 65 in order to afford retirement.
In fact, more than 67 per cent of Canadians think that Canada will be facing a retirement crisis. This anticipates problems down the road such as employee turnover, since turnover between older and younger workers may be disrupted as more older employees have to continue working to be able to financially support themselves.
Unpacking the conversation on retirement plans
The thought of a retirement crisis in Canada have flooded the offices of politicians and the minds of students entering the workforce. The pandemic has left many people with a bleak outlook on what their future retirement looks like. While it is great that Gen Z and millennials are putting aside income for retirement early, it does raise a lot of red flags about the state of our economy and fuels many questions on how to make retirement more accessible to everyone.
One solution may be in the hands of the employers. A study by the Ontario Health Pension Plan has shown that over 77 per cent of Canadians agreed to the idea of employers offering workplace pension plans.
Unfortunately, discussing pension plans at work is not a conversation that many people feel comfortable having. If employers were open to discussing ways to develop retirement plans, and if employees were more open to begin these difficult conversations, perhaps workplace pension plans would be considered down the line.
Investing early in an RRSP can reduce stress in the future and provide a sense of security for individuals — which is why we need to have more conversations surrounding RRSPs.