It’s OK Not To Be Saving For Retirement In Your 20s and 30s

by Mr. Cheap

I always enjoy features in MoneySense or the Globe and Mail where they profile a family, highlight their current money issues, then consult with a panel of financial planners for suggestions on what the family should do moving forward.  Some time ago in MoneySense, they talked to a couple who worked, lived a frugal lifestyle, were paying down their mortgage on an accelerated schedule and fully funding their children’s RESPs, but at the end of the day had nothing left for retirement savings.  They asked what they were doing wrong.

Most of us remember at some point seeing the chart or hearing the idea that if you saved $200 / month from your 25th birthday until you retired, you’d have more than someone who saved $400 / month from their 35th birthday until they retired.  That’s the magic of compounding!  Many of us see this type of thing and it motivates us that start saving early and often.  HOWEVER, there’s another side to the issue.

It’s probably MUCH easier for the typical 35 year old to save $400 / month than it is for a typical 25 year old to save $200.  As you get older, usually your earning power goes up, and at a certain point your expenses go down (once your mortgage is gone and the kids have left home).  Even though you have less time for compounding to do its thing, you have the capacity to save more.

This was the response from the experts to the couple mentioned at the beginning of this post.  They were already taking care of a number of big expenses, and the experts said they needed to put retirements savings on hold.  With a paid off mortgage, and significant savings for the children’s education in place, at a later date they’ll be capable of directing far more of their income at retirement.

The other comment, which I also felt was worthwhile, is the experts warned that they shouldn’t live an impoverished life NOW to avoid living an impoverished retirement.  As Buffett might say “it’s like saving up sex for your old age“.

I was talking to a friend in a roughly analogous position recently.  She’s a mind-30s professional and opened an office in the last couple of years.  She’s paying all the bills and funding her modest lifestyle, but doesn’t have a lot left for retirement savings or investing.  When she was worrying about this, I told her that she should be patting herself on the back for having a successful business (that’s far beyond ramen profitable).  Her financial focus right now is growing her business, which is what it should be.  It will naturally compound and begin growing organically (word of mouth and all the marketing she has in place), at which point she can start directing more money toward retirement (and keep increasing this as her business grows).

This all certainly isn’t to say that saving (and especially retirement saving) is unimportant.  If someone says they aren’t at a stage in life to be saving for retirement then buys a plasma television or an expensive furniture set, I’m not going to be able to get behind their decision.  Instead, I’m saying that if you’re saving for your kid’s education, paying down your mortgage or investing in a business, you ARE preparing for retirement (just not using an RRSP).

Don’t beat yourself up.

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{ 11 comments… read them below or add one }

1 CPS

That Buffett quote is awesome!
This post actually sums up what I’ve been thinking lately too. Although, I feel that many would disagree, but I’m standing strong and saying the delayed gratification is for people who put off having fun…and by the time they can, they’ve forgotten how. Now I have an even better quote to use!

2 Four Pillars

Great quote.

I too enjoy those “financial profile” articles.

I think something that people often forget is that paying off debt is considered saving (or it should be). If someone wants to pay off all their debts off before saving for retirement then they aren’t likely to be any worse off than someone who does both at the same time. Of course if the stock market does really well during that time then the earlier investor might come out ahead but both will do well.

3 Nurseb911

Mike makes a great point about paying off debt and it should be more of a focus for young people.

I’m biased as a saver (frugal individual). I think saving is important and easy and it doesn’t have to be a large amount of money. Saving something (even for a larger purchase) creates an important foundation for your future finances. I don’t think people should beat themselves up, but having a goal to work towards (retirement) can be a powerful motivator in achieving financial freedom.

4 guinness416

I think this is a great post Mr Cheap! I like those profiles too and find the advice in them is ususally pretty sensible. Actually moneysense often has that you-don’t-need-to-do-it-all-at-once message. I see this attitude in blog comments sometimes too, people feeling that the system is keeping them down because they can “only” afford to max out RRSPs and TFSAs but can’t put away college funds or pay down the mortgage or whatever. So much stress people put on themselves!

Wonderful Buffett quote. Personally I am naturally a decent saver and moderate cheapskate, but certainly burned a LOT of money on experiences and misadventures in my twenties that could be in my RRSP (or home equity) now. Still do sometimes I suppose. I don’t regret a cent of it.

5 Financial Samurai

Good topic! I’ve told a lot of my younger acquiantances who are earning below $100,000 that the value of their $ is worth MUCH more now than saving it, so spend it freely!

What’s the point of driving a Porsche 911 at 65, when you can look cool driving at 28? :)

Seriously though, this makes a lot of sense. But, I started saving 50%+ of my annual salary since the age of 24 b/c I wanted to retire by 45. That’s just me. To each their own.

6 Sampson

I’m another who loves reading those profiles, however, I think they should have follow ups to see how the people have done a few years down the road.

While I agree that saving later can be done, I personally don’t think its a good idea. My wife and I have always been big-time savers, and are having to ‘learn’ how to spend out money. This is much easier than the reverse. If you’re used to living a lavish lifestyle and are suddenly ‘forced’ to save for retirement, I’m certain this is much more difficult than saving early and maintaining and even increasing it as your salary increases.

7 Four Pillars

Sampson – Great suggestion about “follow up” articles. That would be interesting.

I don’t think Cheap is saying that young people should “live it up” and then learn to start saving later – but rather that if they are putting extra money into mortgage pre-payments or building up a business or career (ie going back to school) then don’t worry about the lack of retirement savings.

8 Nolan Matthias

Good article, I especially agree with the concept of living life to the fullest, in fact I recently wrote an article on this myself, the gist was that it is not about living a lifestyle you can’t afford, it is about finding a way to afford the lifestyle you desire.

When it comes to telling someone that it is okay not to save however, it is important not to overlook one key factor, and that is habits. Habits are the foundation of how people save, invest, pay off debt, and spend. Forming a habit around saving monthly, and doing this early is as important if not more important than the compounding effect of interest. Those who learn to save before all else early, maintain this habit throughout their lives, those who get into the habit of paying down debt quickly often end up looking for more debt to pay down because that is what they are accustomed to.

Forming the right habits for when one is debt free, at least in my mind will make or break an individual. Just because one pays down debt now, may not mean they will be inclined to save money in the future.

Saving early also has one other key benefit. If you have a large sum of money saved and you lose your job, have unexpected expenses, or cannot work, a savings can literally, well, save you. The same cannot be said for having an almost paid off mortgage that still has a payment to be made every month.

Kind regards,

Nolan Matthias

9 Credit Card Chaser

Haha I am definitely going to be using that Buffet quote! BTW I definitely agree with pretty much everything you said in the post especially from the perspective of your friend the business owner.

10 Ken

I do think savings as a habit is valuable. If you’re building a business it may be OK to limit the amount saved but don’t throw the baby out with the bath water. Besides, even businesses go through hard times…ie rainy day fund. Nice post!

11 Shevy

Yes, saving money is a valuable habit to get into. I think the couple profiled in MoneySense are behaving responsibly for the most part but I would suggest that they open at least one RRSP and put $10/wk into it. No, $520/year isn’t a fortune but it’s something and it’s forming that habit of saving for retirement. Once they feel more comfortable financially or get any kind of raise, they can start to increase the RRSP deposits.

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