Young Canadians are starting to save earlier for their retirement
Feathering nests for the future
Young Canadians are starting to save earlier for their retirement
In the volatile economic climate of the 1990s, even romance often takes a backseat to the joys of RRSP savings or a passion for investing in mutual funds. In fact, at a recent dinner party in Toronto, a conversation between Jeanette Pietrangelo, 28, a senior branch co-ordinator in the circulation department of a newspaper, and Mary Grande, 24, a secretary with a local heating and plumbing contractor, quickly veered from the autumn weddings they are both planning to the virtues of investing in registered retirement savings plans. Grande confided that while her friends often discuss the tax advantages of opening an RRSP, she has never actually invested in one. But Pietrangelo, who opened her first RRSP plan five years ago, quickly suggested a solution.
She had recently found a good financial planner who was helping her to zero in on the most suitable mutual funds for her needs, and she offered to introduce him to Grande. “I’m too busy to do that for myself,” explained Pietrangelo. “Right now, I need a financial planner who will keep me informed of my options at all times.”
Until 20 years ago, it was usually referred to as “saving for a rainy day.” It was done principally by middle-aged Canadians after they had paid off their mortgages and educated their children. Today, however, the growing unease about the future of Canada’s traditional social safety net has led an increasing number of young investors to begin saving earlier in life. Few people entering the workforce expect to benefit from the Canada Pension Plan upon retirement. At the same time, widespread corporate downsizing and restructuring means that more £ Canadians than ever are working ^ on contract or in part-time jobs that do not carry job security or full company pension benefits. Furthermore, many of those graduating from school into an uncertain workforce are often living longer at home with their parents, and they are using that opportunity to accumulate personal savings. With recent changes in RRSP rules—and the advantages of beginning to save for retirement earlier in life being constantly reinforced by financial institutions—the message appears to be hitting home. Said Pietrangelo: “I want to be somewhat financially secure.”
According to a national poll conducted by
Toronto-based Decima Research last November, she is not alone. The poll showed that about 28 per cent of Canadians between the ages of 18 and 24 plan to make RRSP contributions for the 1994 tax year. That number rises to 45 per cent for those in the 25-to-34-year-old age group. Furthermore, a preoccupation with financial security has created a strong appetite for low-risk investment among these younger investors. About two-thirds of poll respondents indicated that they would opt for the “safety” of mutual funds because they are both diversified and professionally managed. Says Brian Lee, 31, a product support specialist with
Northern Telecom in Ottawa: “When I was in university, I lost my tuition money by investing in stock options. I’ve tried taking risks but now I’m more interested in simply saving.” Fuelled in part by the enthusiasm of a new generation of investors, mutual fund assets in Canada alone have soared to $127.3 billion last year from $9.8 billion in 1983. About onethird of those mutual funds, or $40 billion, is held inside RRSPs. Colin Deane, a senior principal with Toronto-based accounting firm Ernst & Young, forecasts an astounding average growth rate of 16 per cent per year over the next ten years for mutual funds. “It’s now
feasible to look towards the day when the Canadian mutual fund industry will hit $1 trillion in assets,” he said. “And possibly as early as a decade from now.”
Still, not everyone seems to be getting the message. For his part, James Wade, 30, who earns $34,600 a year as a letter carrier with Canada Post in Ottawa, says he has a secure job and enough money to meet his basic needs each month. But Wade, who currently has $6,000 in a bank savings account, has no RRSPs, GICs or stock investments. According to Gordon Pape, well-known Canadian author and an expert on RRSP investing, Wade’s case
is the classic example of procrastination gradually eroding retirement income. “Wade could have been contributing to RRSPs for several years. He has $6,000 in savings, after all,” said Pape. “But the failure to do that has cost him valuable tax breaks and thousands of dollars in tax-sheltered compounding.”
To remedy that common situation, Pape says that people in Wade’s position should first determine how much they can contribute to an RRSP for the years missed since 1991. That is the first year that missed RRSP contributions were allowed to be carried forward. They should then enrol themselves in a payroll deduction plan at a bank or in the workplace, setting a monthly contribution level that will cover both the current year’s entitlement and a portion of the contributions they have missed over the past four years. And to maximize earnings in their RRSP, Pape suggests diversifying among several mutual funds or other investment vehicles.
Certainly that is the sort of strategy that the federal government is also encouraging through current tax policy. For the past five years, Ottawa has provided an increased menu of incentives for all Canadians to save for retirement on their own. The most popular of these has been increasing contribution limits from $7,500 in 1990 to a maximum annual RRSP contribution limit of $13,500 for 1994. And in 1992, because of tough economic times and the diffi-
culty in saving enough money for the downpayment on a house, one RRSP rule was loosened especially to help young investors get started. This new option allows individuals to borrow up to $20,000 from their RRSPs tax-free to buy their first home—an option that an estimated 20,000 Canadians have exercised since it was introduced three years ago.
Some financial planners, however, warn that using hard-saved investment capital to buy a home results in a critical loss of the long-term compounding of money. As a result, an investor’s RRSP savings—boosted by the attractive real rates of return that both fixed income and stock market investments provide—may result in better rates of return than the housing market in the foreseeable future. But most important, many financial planners would like to see RRSPs used solely for retire-
ment savings, as they were originally intended to be. Says Peter Volpe, 36, vice-president of Toronto-based Integra Capital Management Corp.: “I don’t like the latest gimmick—using RRSP money to buy a home. I don’t think there are substantial advantages to people. The long-term consequences of losing that compounding is great. Too many people focus on the short term.”
Many younger investors are also making more of their own investment decisions and carefully designing their own custom portfolios. For one, Cathy Luker, 36, who does freelance work in the animation industry in North Vancouver, has invested in RRSPs for the past two years. Currently, she holds about $16,000 in GICs and other fixed income securities. Because she and her partner, Ron Crown, 31, are both self-employed, their combined income fluctuates between $40,000 and $90,000 annually. Consequently, their RRSP investment choices are always conservative. “I used to be a stockbroker, and I manage our finances,” says Luker. “The RRSP savings are just from the last two years and we contributed our maximums.”
But the drive to secure a solid financial future has also led some of those with a longer retirement horizon to take a riskier approach to saving. Rick Mazurkewich, 34, a petroleum engineer and his high-school teacher wife, Kari Gregory, 29, both of Calgary, diligently research their investments before choosing one. They strongly believe that time is on their side and, with a combined income of $100,000, they can achieve greater returns in their plans by holding a large percentage of their savings in stocks and stock-based mutual funds rather than highly conservative savings accounts, GICs or bonds. “I think our gains can be greater in stocks and funds, because we’ve got 30 years before retirement,” said Mazurkewich. “Everybody talks about security with GICs, but how secure are you if g you retire and you don’t have enough funds?” i Still, there are many young Canadians who I have never—and may never—make any kind of RRSP contribution. For one, Toronto magazine editor John Montesano, 28, says that even though he has stopped renting an apartment and has returned to his parents’ home, he is not convinced that investing in RRSPs is the right way to go. “I keep getting bombarded with information, and part of me knows that I should be putting some money aside,” said Montesano. “But I’m not convinced that sacrificing my lifestyle now will really be worth it in the long run. So many things could change in 30 years.” But in today’s tough economy, he is increasingly becoming the exception, not the rule. And thousands of young Canadians like Pietrangelo and Grande have begun saving money today to ensure that in the future they will be happily savoring gourmet meals instead of frantically searching for the money to pay for them.
JULIE CAZZIN with BEVERLEY WOOD in Vancouver, MARY NEMETH in Calgary and LUKE FISHER in Ottawa
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