The idea of saving for retirement might feel like a distant concern for a 20-year-old. Yet starting early can provide incredible long-term benefits. While exact data on the average Registered Retirement Savings Plan (RRSP) balance for someone in their early twenties is hard to pinpoint, those under 34 have an average of $16,220. A 20-year-old could hold under $10,000.
Many young Canadians are just beginning their careers, balancing student debt, or prioritizing other financial goals like saving for travel, education, or a first home. But don’t be discouraged if your RRSP balance isn’t where you’d like it to be. The important thing is that you’re thinking about it now. This gives you a significant head start compared to those who wait until their 30s or 40s.
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What’s enough?
When we look at the bigger picture, the average RRSP balance across all age groups in Canada was around $113,070 as of 2023, according to Statistics Canada. However, this average is skewed by older Canadians who have had decades to contribute. For someone just starting out, even having a few thousand dollars saved is a great first step.
If you’re wondering whether your savings so far are “enough,” it’s worth noting that the earlier you start, the less you’ll need to contribute each year to meet your retirement goals. For example, if you were to start investing $400 monthly in an RRSP at age 20, earning an average annual return of 4%, you could end up with over $600,000 by age 65! If you wait until age 30 to start, you’d need to double your monthly contributions to achieve the same outcome. So even if your current balance feels underwhelming, the key is to get into the habit of saving regularly.
Safe investments
To supercharge your RRSP, you’ll want to invest your contributions wisely. This is where exchange-traded funds (ETF) like the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX:CDZ) come into play. CDZ focuses on Canadian companies that have increased their dividends annually for at least five consecutive years. Why does that matter? Dividend-paying companies are often well-established and financially stable. This makes them appealing for long-term investors. Plus, the dividends themselves can be reinvested to accelerate your savings growth.
CDZ has performed steadily over the years. Its holdings span a variety of industries, providing diversification across the Canadian market. This diversification helps reduce risk while still offering exposure to companies with a history of returning value to shareholders. While past performance is not a guarantee of future results, the ETF’s focus on dividend growth companies suggests a commitment to stability and resilience – even during economic downturns.
The ETF’s dividends also provide an excellent source of passive income. As you reinvest those dividends, you’re essentially putting your money to work, compounding your returns over time. This strategy is especially powerful for young investors who have decades for their investments to grow. The key is to remain patient and stay invested through market ups and downs, as the compounding effect takes time to realize its full potential.
Foolish takeaway
To catch up if you feel behind, consider automating your RRSP contributions. Set up a monthly transfer that aligns with your budget. Consistency is far more important than the amount you start with. Begin by contributing what you can afford, even if it’s just $50 or $100 a month, and increase that amount as your income grows. Over time, these contributions will add up, especially when paired with the compounding returns from an investment like CDZ.
Finally, it’s important to think about the long-term goals for your RRSP. Are you aiming for a specific retirement age? Do you want to travel extensively in your golden years, or are you saving primarily for peace of mind? Understanding your “why” can help motivate you to stay on track and make informed investment decisions. With discipline and a clear plan, even a modest start at age 20 can set you up for a financially secure and fulfilling retirement.
