Wedding, home ownership, retirement: How to invest for three big life-stage expenses
You’re an ambitious young Canadian with big life plans and financial goals: Saving for a wedding, planning for retirement, or keeping the dream of owning a home alive.
Many millennials and Gen Z know they should be investing to save up for these expenses — but they may not be sure which strategies lend themselves to achieving those goals. Last year, a Leger survey found only 26 per cent of young Canadians were confident in their abilities to choose the right investment opportunities, while four in 10 said they don't have all the information they need about investing options.
The reality is one size doesn’t fit all when it comes to investing, and the best strategies depend on your goals. We asked experts to recommend approaches for three different milestone expenses.
Investing for short term goals, such as a wedding or a new degree
If you’re looking to spend the money you’ll be saving for the next couple of years, maybe on a wedding or going back to school, experts agree young Canadians should stick with low-risk investment options.
“If it’s a wedding that’s two years down the line, you can’t risk that money; that can’t go in the market because you don’t have time to weather the ups and downs,” says personal finance educator Kelley Keehn.
Given the volatility of stocks, by investing in them, you could end up with less money when it’s time to walk down the aisle or pay tuition. Experts suggest high-interest savings accounts and guaranteed investment certificates (GICs) instead, as there’s little risk of losing money with these options.
Most of the Big Six banks offer interest rates between 0.01 per cent and 1.7 per cent, but many online banks are offering interest rates between 4 per cent and 5 per cent. Some banks are also offering promotional rates as high as 6 per cent — Keehn suggests shopping around for the best rate.
If you know you won’t need the money for a year or two, locking the funds in a one- or two-year GIC may be the better option as they typically offer higher interest rates compared with most savings accounts. But it comes at the cost of convenience. Many GICs are “non-redeemable,” which means your money is locked in for the duration of the term. If you want your money back sooner, some banks will charge you a penalty for withdrawing early, while others make it a non starter.
Investing for long-term goals, such as retirement
Retirement will likely be the longest-term investment goal for most Gen Z and millennials, which usually means investing in a mix of stock and bonds. “Most people have a very low tolerance for risk when they’re just starting, because they don’t have experience [with investing],” says Jessica Moorhouse, a financial educator and host of the More Money podcast. “But as you gain that experience and knowledge about investing, it’s important to make sure you are in a high ratio of stocks compared to bonds.”
Some options for long-term investing include investing in mutual funds, using a robo-advisor, or self-directed investing through individual ETFs.
How much you need to save for retirement also depends on your employment situation. If you work for an organization with a strong employer-matched pension, you may not need to save as much of your own money for retirement compared with someone who is self-employed.
“This is where you also have to look at your career as part of that puzzle, because that’s going to help you determine how much you have to save on your own, or how much you can work with your employer to build that part of your financial plan,” Keehn says.
Contributing to a registered retirement savings plan (RRSP) can enable you to reduce upfront taxes while saving for retirement. Keehn suggests speaking with an expert to see if an RRSP is right for you.
Despite the name, an RRSP isn’t the only type of account that can be used for retirement purposes. You can choose to put your retirement funds in a tax-free savings account, and like an RRSP, the money you make off of your investments will be protected from taxes. A first-home savings account (more on this below) can also be used for retirement — if you don’t buy a home within 15 years of opening the account, you can transfer that money into an RRSP and it won’t affect your RRSP contribution room.
Keehn suggests getting a few different opinions from professionals, understanding that regardless of your initial plan, you’ll probably end up having to tweak it as you go.
Investing for medium-term goals, such as homeownership
For young Canadians working toward buying a home, experts say it’s important to evaluate your financial situation and to figure out how long it will take you to afford the home you want, as the best investment strategy will vary depending on your timeline.
High-interest savings accounts and GICs are the right choice if you know you will be ready to buy a home within three years, given these are low-risk investments that are ideal for a short time frame. However, given the sky-high housing prices in many Canadian cities, particularly in Ontario and British Columbia, Moorhouse that it may take closer to 10 years for some young Canadians to save up for a down payment.
“I’ve talked to people [who] took that old advice of just putting cash in a savings account for a down payment, and then they saved for many years longer than they expected,” she says. “If you think it’s going to take longer than three years [to save for a home], it makes sense to invest that money.”
If this is your first home, experts recommend taking advantage of a first home savings account (FHSA) to save on taxes while investing. “If you’re eligible for the FHSA, open that up because you’re not stuck,” Moorhouse says. “If you decide [not to buy a home] later on, you can port that money over to your RRSP and it doesn’t affect your RRSP room.”
Thanks to the federal government’s Home Buyer’s Plan, first-time homebuyers can now borrow up to $60,000 from their RRSP for the purpose of buying a home. It’s important to remember you will need to pay this money back within 15 years, which Moorhouse warns may be more of a financial burden than initially expected.
“A lot of people may not make the calculation properly,” she says. “You buy a home, you realize it’s so much more expensive, [the] cost of living has increased more than you expected, and you have to pay back money into your RRSP, and you don’t get another tax deduction.”
No matter the goal, experts agree it’s important to take the time to educate yourself on all the investing options available and continuously re-evaluate your strategies to make sure they’re still working for you.
“I always tell people, it’s about building wealth slowly,” Moorhouse says. “It’s not a race. You’re not competing against anyone, you’re just trying to reach your goals. So take the time to educate yourself and if you need to work with a financial planner to get more information, do that.”