How Gen Z Canadians Can Save For Retirement Despite Challenges

According to the latest BMO Real Financial Progress Index, far fewer Generation Z Canadians say saving for retirement is part of their financial goals (29%) compared to older generations.

Despite the monumental challenge of high cost of living making it harder to set aside money after expenses, another recent survey indicates Gen Z and millennial Canadians want to start saving for retirement, even if they can't.

And even with the Bank of Canada's announcement in September 2023 stating it was holding its key interest rate steady at 5.0 per cent, financial pressures haven't subsided after multiple previous hikes.

So, we have compiled a to-do list for you if you want to start saving early for a plush retirement.

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Start planning

Get a rough idea of how much money you'll need to afford the retirement lifestyle you envision. Be sure your going-out expenses may decrease, but some costs typically increase, such as health care and long-term care. One rule of thumb is to multiply the number of years you might reasonably expect to live in retirement (say 20 to 25 years or more) by a figure that's 80 per cent of your pre-retirement income.

If you're young, assume your income goes up two per cent a year until you stop working. If your final income is $100,000, you can expect to need $80,000 annually for each year of retirement or $1.6 million for a 20-year retirement window.

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Regularly contribute to an RRSP and a TFSA

A registered retirement savings plan (RRSP) is a retirement account that allows you to deduct contributions from your taxes. You can open one of these accounts yourself or participate in a group account through work. Group RRSPs through the workplace often include matching programs, where employers contribute a percentage of the fund, helping it grow faster.

Being part of an employer-matching plan is the most lucrative form of RRSP ¡ª after all, employer contributions are literally free money. But staying with a single company long enough to amass significant contributions isn't always an option. Younger generations, particularly, have learned to leverage "job-hopping" to avoid burnout, job dissatisfaction and stagnant wages.

According to the BMO Real Financial Progress Index, more Gen Zers say they are currently switching jobs or have switched jobs recently (20%) compared to older generations. Plus, roughly 40% of Gen Z say that generating additional income streams is the type of personal finance they are most interested in.

The good news is that most group RRSPs offered through employers allow you to transfer your money to an individual account if you leave a company. If you're switching jobs or unable to participate in a matching program through work, you can open a self-directed RRSP and make contributions directly from your bank account, said Okuyama. "While you won't receive the employer portion, having a disciplined saving strategy will help build strong habits."

Self-directed RRSPs offer greater control over the investments in your account compared to standard individual RRSP accounts.

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Don't forget the unused RRSP contribution provision

RRSP contributions are tax-deductible up to a limit, which means you can deduct the amount you contribute from your income and lower your tax bill. "If you make an RRSP contribution, you don't have to use the deduction that same year," said Okuyama. "This strategy allows you to apply the deduction in future years when you know you'll be in a higher tax bracket."

For example, let's say you contribute $2,000 to your RRSP this year, but you only need to deduct $1,000 for your tax bill to reach zero. You can save the remaining $1,000 for a future year when you need the extra deduction.

Being strategic about your deductions can lead to greater savings in the long run and get you one step closer to your retirement goals.

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Save for a house with your retirement in mind

Saving for a home is an important priority and shouldn't be devalued in favour of retirement. But there are ways to cover both goals if one doesn't work out.

For example, a first home savings account (FHSA) allows you to contribute up to $40,000, tax-free, which can be put towards a down payment. And should you ultimately decide not to buy a house, you can repurpose the money for retirement. "If the funds are not used to purchase a qualifying home, you can transfer the assets to your RRSP on a tax-deferred basis," Okuyama said.

You must be a Canadian resident, 18 years or older and a first-time home buyer to be eligible for an FHSA.

Take advantage of rising interest rates

When interest rates go up, so can the rates on savings accounts and guaranteed investment certificates (GICs). These are investment vehicles that earn interest over set periods of time. Not all banks raise interest rates on savings or investment accounts as they do with mortgage rates, so it's worth shopping around for the best deal.

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Use a TFSA for easier access to your savings

RRSPs can be a solid option for retirement savings, but if you make withdrawals before 71 years old, you may lose 10% to 30% on taxes. On the other hand, a tax-free savings account (TFSA) allows you to withdraw tax-free money at any time.

Make finance part of your daily life

Gen Zers are just as interested in staying on top of their finances as older generations, according to the BMO Index. A similar percentage of Canadians from each generation say they have written a financial plan (31% on average), set a yearly household budget (38% on average) and set financial goals for themselves (68% on average). If you lean into these habits, you can make your retirement goals less intimidating.

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