Saving for retirement easy as RRSP

You hear it from financial experts all the time — start saving for your future while you’re young. But when you’re young, you don’t have a lot of disposable income to play with. And there’s always an excuse — I’ll contribute when I get my next raise, after I pay off my student loans or when I get a better job.

While many of us hold an RRSP account, according to RBC, more than half of Canadians aged 18 to 34 still don’t. And as life expectancy grows longer, we might have to save a lot more in order to have enough money for retirement.

If you’re someone who hasn’t opened up an RRSP yet, here are four basic things you need to know about opening up your own account.

1. Set a retirement goal

It’s not that fun thinking ahead 30 or 40 years from now, but to make your RRSPs work, you will need to start thinking about what kind of retirement lifestyle you want to live. Do you want to spend your time travelling? Will you be happy living in a condo or cottage — or will you want a large house? Chances are, your priorities and your desired retirement lifestyle will change as you get older, but having a rough idea in place now will give you a starting point for future planning decisions.

2. Take baby steps

You don’t have to start by saving hundreds of dollars from every paycheque. Find a number that works for you — even if it’s only $25 bi-weekly — and have it automatically deducted from your bank account as soon as you get paid. An amount that small will do nothing to disrupt your lifestyle. And once you see that money start to accumulate in your account, you might be inspired to start saving a little more from every paycheque.

The key is to keep investing regularly into your account. Establishing a pattern of saving now while you’re young will ensure that saving money becomes a force of habit when you’re older. Whether you decide on bi-weekly contributions or a lump-sum payment once a year, figure out which strategy works best for your lifestyle and stick to it.

3. You can manage everything online

The emergence of online banking makes it simple to open and contribute to an RRSP account. If you feel comfortable doing it yourself, you can go to your bank’s website, fill out some personal information and follow the instructions to open up an account yourself. But if the thought of opening up an RRSP by yourself is too intimidating, just make an appointment at your local bank branch. Someone there will be able to help you open up an account and show you how to access your investments online.

4. RRSP vs. TFSA

There are so many pros and cons about whether 20-somethings should use RRSPs or TFSAs. Many young people choose the TFSA because of its flexibility. You can withdraw the money you’ve contributed at any time, penalty-free. With an RRSP, however, you can only withdraw money penalty-free by using the First Time Home Buyer’s Plan (HBP) or the Life Long Learning Plan (LLP).

When you contribute to your RRSP, you might get money back when you do your taxes. It works like this: The government reduces your income by the amount that you’ve contributed. For example, if you made $15,000 in 2011 and put $3,000 into your RRSP account, that contribution would be deducted from your pre-tax income, making it seem in effect as if you’ve only made $12,000. They will then give you back the taxes you paid on that $3,000.

Krystal Yee’s 20-Something & Change blog is found at Moneyville.ca