Retirement saving: Starting out case study

Just beginning: A recent graduate has no cash to spare for saving. Or does he?

Photo by Brett Gundlock.

THE DILEMMA: Aaron Brown, a 26-year-old public-relations consultant, is worried about retirement—or, more specifically, he wonders if he should worry about it more. He has just $2,000 in RRSPs and other savings. Since graduating from university in 2009, he has travelled while freelance writing. Currently residing in London, Ont., he has contracts with several clients, and is hopeful of landing a permanent job with a beer company. While his income is low—$18,000 in 2011—so is his debt: he has no student loans and only about $500 on a credit card.

While Brown encounters constant reminders about the importance of starting to save early, he finds he just doesn’t have the money to put away right now. “There are a lot of other things taking priority over retirement, like owning a car or a house,” he says. “Those are the things I’d do first before I started really socking away for retirement.”

He hopes to start retirement savings within five years. His goal is to be able to travel modestly in retirement, living in various countries for extended periods. He wonders if there’s a magic savings number he should be aiming for that would enable him to live comfortably. For now, he envisions his golden years as one of two extremes: “as a lottery winner, or eating my dinner out of a tuna can.”

THE SOLUTION: Warren Mackenzie, president of Toronto-based Weigh House Investor Services, isn’t surprised by Brown’s ambivalence. When you’re just embarking on a career, the finish line is the farthest thing from your mind. The important thing for Brown isn’t saving for retirement so much as getting in the mindset of controlled spending and laying out a financial road map. “Even if he starts putting aside $10 a week, at least he’s making progress,” says Mackenzie. “Because of how much time it has to compound, it doesn’t have to be a lot right now.”

Mackenzie adds that saving for the future doesn’t have to mean big sacrifices in the present. If Brown saved $20 per week every week for 40 years, with a 6% average return, he would have about $200,000. “You have to enjoy your life, but it’s not that much of a cost if saving [becomes] a part of your lifestyle.” Mackenzie’s other tips:

¦ Start now. Typically, 10% of your income should go toward savings, but at Brown’s age, anything above zero is good.

¦ Never get into a lifestyle that eats up all your income. While your earnings are low, that may mean a basement apartment rather than a condo with a view.

¦ Skip the double-double. “If you’re spending $3 a day on coffee, that’s about $1,000 a year. Over the rest of his life, that would accumulate to about $200,000.”

¦ Build a financial plan. The only magic number is the one that will let you afford the retirement you envision.

¦ Read up: Your Money or Your Life by Vicki Robin and The Richest Man in Babylon by George Clason.