A simple, smart investment to put in a TFSA or RRSP is a portfolio of exchange-traded funds.Amy Mitchell/iStockPhoto / Getty Images
The conventional approach for answering a 22-year-old asking about retirement saving would be to point out the benefits of TFSAs, talk about adding RRSPs later on and include a mention of low-cost ETF investing through a digital investing platform.
But what about home ownership? With house prices soaring, young adults have to be realistic about saving for the future. Saving for both a house down payment and retirement may not be realistic. One of these goals may have to take precedence.
A reader, 22, recently asked about retirement planning: “I just wanted to know which would be the best type of retirement investment for me as a young man,” he said by e-mail. He’s done some research online and heard about a retirement savings vehicle for Americans, the IRA, or individual retirement account. What should a Canadian look at?
Tax-free savings accounts are an ideal, all-purpose investment and/or savings vehicle for young people. TFSAs have a 2022 contribution limit of $6,000 (and more if you’re above the minimum age of 18 and haven’t contributed before). If you have more than that to save or invest, a registered retirement savings plan makes sense.
A simple, smart investment to put in a TFSA or RRSP is a portfolio of exchange-traded funds. Using an online broker or digital investing app, you can assemble an ETF portfolio with four or five individual ETFs, or an asset allocation ETF that provides a balanced portfolio in a single purchase. One other possibility is a robo-adviser – you pay a reasonable fee to have an ETF portfolio built and managed for you.
But what about home ownership? With a national average resale home price around $713,500 and a growing number of cities averaging around $1-million, saving a down payment is a huge challenge. Money put away for retirement at age 22 could easily end up diverted to a home down payment in a few years.
RRSPs are an attractive compromise choice for retirement and home buying because of the federal Home Buyers’ Plan, which lets you borrow and withdraw up to $35,000 tax-free from an RRSP to buy a first home. You have to repay that money to the RRSP over a maximum of 15 years.
TFSAs might be the better choice, though. Money can be invested in a TFSA and then withdrawn, all without tax consequences. You can recontribute money withdrawn from a TFSA if you follow some basic rules, but there’s no obligation to do it according to a particular schedule.
A young 20-something could label their TFSA as a housing/retirement fund. A next step would be to figure out how aggressive to be with the investments in the account. Planning to buy a house in five years or less argues for using a conservative vehicle, such as a high-interest savings account. A five- to 10-year horizon allows for a mix of stocks and bonds.
And what if this 22-year-old is fully committed to retirement saving? With an estimated 45 years to go until the money is needed, a much more aggressive investing approach is possible. All or mostly stocks is not out of the question.
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Rob Carrick