When starting a financial plan, one goal might be to save at least 10 per cent of after-tax income.Getty Images
Young professional workers face an array of decisions as the comfort blankets of their education or training years are pulled away and replaced with new realities. They need to figure out how to accumulate down payments for homes, cover wedding costs, commence retirement nest eggs, manage debts before they get out of control, and acquire life and health insurance.
“There’s a lot of moving parts when you’re a young professional because you’re just getting started,” says Jeanette Power, senior wealth advisor at The Power Investment Team, part of CIBC Private Wealth Wood Gundy.
While there’s much to sort through, it’s the right time to build the foundation for a solid financial future. As a rule, young clients should save at least 10 per cent of after-tax income, Ms. Power suggests.
Financial planning requires a high degree of customization, and while there’s no such thing as one-size-fits-all, certain groups do have similar needs. Many young professionals require solid initial guidance to help meet their priorities.
“There’s a coaching aspect to get them to start to articulate what’s important,” says Kimberly Jensen, a financial planner at Victorious Financial Services, part of Sun Life Financial. “At this stage of their life, are they looking to get married? Are they looking to start a family? Are they looking to graduate from a professional program? Maybe they’re thinking about starting a business.”
She says young clients should be thinking about goals in time intervals, looking at what’s achievable in the short term (one to five years), medium term (five to 10 years) and long term (10-plus years).
A short-term goal might be as simple as paying their credit card bills on time. “Sometimes you don’t even realize how that affects your credit score down the road,” Ms. Power says.
A medium-term goal might be home ownership, while retirement savings or setting aside money for a child’s education are further down the road.
Look for tax-efficient strategies for home ownership
Once objectives are identified over each period, a financial plan should address any existing debt and include a risk-adjusted investment portfolio. “If it’s retirement, we have a long time horizon. If it’s short-term, like buying a first home, we’re likely not going to be taking on as much risk,” Ms. Jensen says.
She adds that younger clients looking to purchase a home should be mindful of tax efficiencies, such as using a First Home Savings Account (FSHA) or the Home Buyers’ Plan (HBP) from a Registered Retirement Savings Plan (RRSP).
The HBP allows for a $35,000 tax-free withdrawal that must be paid back within 15 years. FSHA contributions are completely tax deductible, helping reduce a client’s tax bill for the year it is claimed, or generating a return that could then be put into a Tax-Free Savings Account (TFSA) or RRSP.
“In effect, with one stream of cash flow, we could potentially be generating more opportunities to put toward their overall plan,” Ms. Jensen says.
Time to take risk
Even saving for a near-term goal shouldn’t completely take risk off the table.
“You’d think that younger people in that time of their life would be more open to risk, but I find that a lot of people are becoming more financially conservative,” Ms. Jensen says. “One of the biggest drawbacks is not actually taking enough risk. We want investments to outpace inflation. And when we’re looking at this age group, they’ve got a very long-time horizon. If we’re taking low risks, and barely outpacing inflation or maybe not even that, that’s going to impact that long-term plan.”
For someone in their early 30s, Ms. Power generally recommends they go much more heavily into equities to fund long-term goals, rather than be overweighted in fixed income allocations.
She notes that full-time professionals should study what their employers might offer around RRSP contributions and insurance. “I often ask them to bring in their benefit package. I want those clients to get as much ‘free’ money as they can.”
Insurance plays a key role
For young professionals starting families, Ms. Jensen says insurance should reside at the heart of their financial plan.
Take someone who has $500 a month in income designated for their financial plan. “What should we do with that?” Ms. Jensen asks. “Option A, put that $500 into whatever investment they choose. Let’s say a year from now, that client is diagnosed with a critical illness. They’ve got to take a year off work, and if they don’t have any insurance the only thing we’re relying on is those savings – all of $6,000 [plus returns].”
She says option B is putting $400 of that $500 a month into investments, and the remaining $100 into a critical illness insurance policy that guarantees a $100,000 tax-free payout.
If a client has a young family, term life insurance can be a low-cost part of their financial foundation. “If they’re young and healthy, they can lock into very low rates for a long period of time,” Ms. Jensen says.
Some individuals have insurance in their employee benefits, and can look to beef up that coverage if their plan allows for it. “Quite often, they can increase that contribution. In addition, group insurance is even less expensive.”
If someone is relying on employer benefits, Ms. Jensen notes the risks of being left without that coverage if you change jobs, decide to become an independent consultant or start your own business. “Those employer benefits go away.”
That’s why having your own insurance that stays with you is essential, she says. “Insurance is there to protect your income, and to protect your actual investments.”