The best way to save for retirement in your 20s

While saving for retirement is a top priority for half of employed Canadians, many of us (44%) did not actually set aside money for it in the past year, according to the Canadian Retirement Survey from the Healthcare of Ontario Pension Plan (HOOPP). And, nearly half of Canadians (47%) haven’t made or are not planning to make any contributions to their retirement investments, either, a TD retirement survey says. 

Younger Canadians especially struggle with this dilemma. Despite nearly 70% of Canadians under 35 worrying about the cost of living, whether their income will keep up with inflation (67%) and housing affordability (65%), we still place a high value on saving for retirement. The HOOPP survey found that half of Canadians (51%) under 35 would give up a higher salary to get a better pension. 

How much does the average young Canadian have saved for retirement?

If you’re wondering how your savings stack up, as of 2019, the average Canadian under 35 had $9,905 in RRSPs, locked-in retirement accounts (LIRAs) and other retirement savings plans combined, and $8,395 in tax-free savings accounts (TFSAs), according to Statistics Canada.

It’s important to know the difference between “saving” for retirement and “investing” for retirement. If you simply deposit money into an interest-paying registered account like a TFSA or an RRSP, it will typically earn about 3% to 4% interest. But you can also hold investments in these accounts, if you set them up that way. Investments can increase in value over time, whereas with a savings account, you can benefit from compound interest. A key caveat here is the risk/return trade-off: stocks have higher potential returns, but also higher risk compared to, say, a bond or a guaranteed investment certificate (GIC). So, it’s important to understand your risk tolerance before you start investing. 

If you’re just getting started, or your savings are less than the average above, you can still make a plan and catch up. To help you, and myself, I spoke to a few money experts about the best ways to save for retirement in Canada during challenging economic times. 

Ask yourself: How much am I able to save for retirement?

If you’re paying off student loan debt or working in your first job after graduation, you might wonder whether it’s worth it to start building your retirement savings while you’re still getting your financial footing. 

Seun Adeyemi, Certified Financial Planner at True Wealth Advisors in Toronto, says that you should start saving for retirement as soon as possible—preferably, as soon as you have an income. “That makes the journey to retirement a lot easier, because your money has more time to grow,” he says. He does recommend, though, to prioritize paying off any debt besides mortgage debt first—especially if you have high-interest debt like credit cards. 

“On credit cards, you’re paying 19% to 24% [interest] on your debt, and even if you have an amazing [investment] portfolio that’s generating 10% to 15% returns, you’re still underwater because you’re paying a higher interest on your credit card,” Adeyemi says. People can usually save for retirement while managing mortgage debt, he says, as long as they are on top of their payments and don’t get further into debt. 

And even if you are focusing on tackling your debt, try to accumulate at least one month of emergency savings. Experts often recommend more, but as Adeyemi says, “Realistically if you have a lot of debt, it is going to be hard to get three or six months of expenses in an emergency fund.” 

The best ways to save for retirement in Canada for Gen Zers 

One of the best ways to save for retirement in Canada is to take advantage of employer matching programs. Some employers match from 3% up to 50% of your contributions in a registered retirement account like an RRSP or a LIRA, up to a predetermined amount per year. If your employer doesn’t offer a matching plan, it’s still a good idea to set up automatic contributions to a registered savings account—an RRSP or a TFSA, or both. (Learn the difference between RRSPs and TFSAs, and when to use each.) 

“When I started working in my first ‘adult job’ and earned ‘adult money’ is pretty much when I started thinking about retirement and started saving,” says Cassandra Melo (@MoneyWithCass), a nurse and financial influencer in Toronto.

Melo started out by picking stocks herself, selecting major companies like Apple and Boeing. But she eventually pivoted to investing more heavily in exchange-traded funds (ETFs), in order to diversify her portfolio and reduce volatility. She also wanted a more hands-off approach to investing—ETFs allow her to spend less time researching and managing stocks. “Psychologically speaking, I also find ETFs easier to hold long-term, because when I invest in ETFs, I don’t need to worry as much about the individual holdings,” Melo says. “Since an ETF is like a variety pack of stocks, if some of the holdings are performing poorly, the other holdings that are performing favourably often compensate.”

If you can’t afford to make regular contributions, try to allocate any extra money you receive—such as year-end work bonuses, gifts, tax refunds and government rebates—toward retirement. If feasible, you could also take on a side hustle to allocate some additional income toward your investments.

Some credit card rewards programs, such as RBC Avion rewards and National Bank’s À la carte Rewards Plan, even allow you to redeem rewards points towards investments in your retirement savings accounts. Check your rewards program for details.

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How much of your income should you save for retirement? 

There isn’t a “rule of thumb” for all Canadians to determine how much money to set aside for retirement, because everyone’s financial situation and retirement lifestyle will be different. 

However, if you don’t have a group RRSP or other matching plan through your employer, a typical amount to allocate to retirement savings would be 15% of your net monthly income for each pay period, he says. You could set up automatic contributions to your retirement account and invest the funds yourself, or use a robo-advisor that will automatically invest your deposits for you. (Read more about how robo-advisors work, and how to choose one.)

Wondering how much you should save for your retirement in total? In February 2023, you may have heard the buzz about a BMO poll that revealed Canadians feel they need at least $1.7 million to retire. Yes, that’s a huge amount, but how much you need will depend on a lot of factors, including your target retirement age, your target retirement income and your lifestyle goals. The key thing to focus on is that it’s possible to grow a substantial portfolio if you start contributing consistently in your 20s and let compound interest work in your favour for a few decades. 

Check out this chart to see how relatively small monthly contribution amounts, using the average RRSP interest rate of 3%, can grow. This doesn’t account for investment gains or losses. To find out how much your savings could grow based on the amount you can save, check out our compound interest calculator. 

Many financial experts suggest that you’ll need 70% of your pre-retirement income once you’ve retired. But you also need to consider the average lifespan in Canada: 79.5 for men and 84 for women. So, how large should your nest egg be to make sure you’ll have enough annual retirement income? Fidelity Investments suggests using moving benchmarks for your retirement savings. Its numbers recommend that you save one full year of salary by the time you’re 30, three times your annual salary by age 40, six times by 50, eight times by 60, and 10 times by 67. You should also factor in other sources of retirement income, including Canada Pension Plan (CPP) and Old Age Security (OAS) payments. 

Start small and let your money work for you

I’ve paused my automatic RRSP contributions so I can focus on balancing my budget, but I’ve learned that there are other ways I can keep the retirement savings ball rolling. For example, I’m going to deposit my year-end bonus into my RRSP account as soon as I receive it. Regardless of the method you choose for your retirement savings plan, it’s important to have an idea of when you’ll get started and how. Creating a budget is a solid first step. 

Allocating just $100 of every paycheque toward retirement savings can make a world of difference in the future. “When you invest in the stock market, when your money actually compounds—it’s money that’s working for you,” says Melo. “That $100 has the capability of turning into thousands long term.”

When did you start saving for retirement, and what challenges have you run into? Let us know in the comments. 

Read more about investing:

• Which type of ETF investor are you?
• Listen up Gen Z: How to invest as a young person
• How to start investing with ETFs in your 20s
• What’s the average monthly retirement income in Canada?

About Margaret Montgomery

Margaret Montgomery is a former MoneySense editorial assistant and MoneyFlex columnist. She studied business administration at Wilfrid Laurier University and journalism at Centennial College.

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