Have you been saving enough? If that’s a question haunting you, an average single Canadian under 35 saves up to $9,905 in Registered Retirement Savings Plan (RRSP), as per Statistics Canada’s 2019 data. The Canada Revenue Agency’s (CRA) data for the 2020 tax year shows that an individual under 35 contributes $7,251 to the Tax-Free Savings Account (TFSA). The data shows contributions of $6,010 in the 20-24 age bracket, $7,572 in the 25-29 age bracket, and $8,172 in the 30-34 age bracket. The average of three is $7,251.
What does the average TFSA and RRSP balance tell you?
Canadians have been using the TFSA benefits even though it doesn’t allow any tax deductions on contributions. What excites young Canadians is the tax-free withdrawals anytime, which is missing with RRSP. The average TFSA withdrawals have been $6,283 for people under 35.
The average fair market value of TFSA of people under 35 was $10,566. Note this is the 2020 tax year data. Several stocks were hit by the pandemic. The fair market value of many portfolios fell. Those who invested in tech stocks in 2020 and booked profits in 2021 ahead of the fall might have a high TFSA value.
How much are Canadians saving?
It is suggested that one should save at least 20% of their income for short- and long-term financial goals. However, Canada’s household saving rate (seasonally adjusted) was 6.9% in the first quarter of 2024. The reason for a lower savings rate is the high debt. Average household debt is 14.91% of the household disposable income in the first quarter of 2024. This rate was seen in 2019 and the fourth quarter of 2007.
These numbers are a reality check on your monthly budget.
Are you making the most of your TFSA?
If you are 35 years old, your cumulative TFSA contribution room is $95,000. You can check your contribution room in My CRA. If you have $10,000 to $20,000 contribution room available and any savings in bank deposits, now is a good time to invest them in stocks. From here, the bank deposit rates will fall as the Bank of Canada is easing interest rates.
If you are a risk-averse investor, you can buy Enbridge (TSX: ENB) stock and lock in a 7.7% yield that will grow with inflation. You can make the most of this pipeline stock by planning your investment. Only buy it when it trades below $50. It is a cyclical stock and hovers in the range of $45-$55. If it surges above $50, invest in another stock.
And the Enbridge dividend income you get can be reinvested in some high-growth stocks. For instance, a $10,000 investment in Enbridge will buy you 208 shares, and they will pay $190 in quarterly dividends. This dividend income can be invested in small-cap stocks under $5, like BlackBerry or Hive Digital Technologies.
These stocks have the capability to double your money in weeks. When the stock price doubles, you can sell them and invest in long-term growth stocks, like Shopify and Nvidia.
Be careful about how frequently you buy and sell, as TFSA is for long-term savings and not trading.
Are you making the most of your RRSP?
It is natural for the savings of people under 35 to be skewed towards TFSA as they don’t have a significant amount to say goodbye to until retirement. Hence, even though the RRSP contributions are tax-deductible, the taxable withdrawals make it the second choice of investors after TFSA.
The curve in the RRSP contributions goes up after age 35. Canadians aged 35 have an average RRSP contribution of $15,993, and those aged 44 have room of $23,743, as per 2019 data from Statistics Canada.
You could build a sizeable passive-income portfolio in RRSP since lumpsum withdrawals are taxable. Instead, small amounts of passive income can keep your tax bills in check and earn you money from multiple sources, including government and private pensions and RRSP dividend income.
