Canadian millennials in their 30s face a complex balancing act between making major expenditures in the present – buying property, raising a family – and weighing how much to put into long-term savings. At the same time, they must contend with a labour market that offers less job security and fewer benefits.
“People in their 30s should have retirement on their dashboard even though it is many years in the future, but they’re often juggling other financial goals as well,” says Christine Benz, Morningstar’s Director of Personal Finance. “It might be buying a first home or a larger home...funding education is often top of mind. We’re seeing more and more people coming out of school with heavy student debts so it’s not uncommon to see people carry them into their 30s.”
But saving for retirement in your 30s is critical. According to a study by the Center for Retirement Research at Boston College, people who began saving in their mid-30s only needed to save 15 per cent of their yearly income to retire by age 65. Those who began to save in their mid-40s needed to save a whopping 27 per cent.
Risk on
“Since retirement is many years into the future, you’ll want to remember that your risk capacity is high,” says Benz. “You’re not going to crack into those assets for many years, so you can afford to be in higher-returning and more volatile assets like stocks.”
Certified Financial Planner Peter Ficek, with Terra Firma Financial in Calgary, says that the tax benefits of an RRSP are “very attractive and often take priority.” He recommends investors in their 30s build a globally diversified equity portfolio inside their RRSPs and use bonds and cash for any short-term goals.
Another way to mitigate risk is to diversify away from Canada, says Ficek. “Having all your investments in Canadian stocks and bonds increases your concentration risk. To take away that risk, invest some of the funds globally.”
Your retirement savings, “should be focused on higher-risk, higher-reward investments,” adds Benz. However if you are just starting to save, “it makes sense to not start out with single securities, even though it’s enticing to invest in them. You’re going for diversification...That seems particularly important given that we’ve had a long-running rally in the stock market.”
A useful, laid-back approach to investing for retirement is target-date funds. These funds start out stock heavy and gradually dip into safer securities, as they approach your anticipated retirement date. “The nice thing about them is that they’re very hands off,” says Benz.
Knowing whether to invest or pay down debt is an important aspect of managing your finances. Benz recommends thinking about debt as a return on investment (ROI). “If you have a car loan with a five per cent interest rate...you’ll need to outearn five per cent with your [portfolio] to make investing in the market [worth it],” she adds.
Consumer and credit card debt should be the first to go unless your employer makes matching contributions towards your retirement plan. That plan is the only investment you should contribute to before paying off high interest rate debt, as matching contributions have an excellent ROI of 100 per cent.
A couple of scenarios illustrate how these concepts can work in practice.
SCENARIO 1: SINGLE GIG-ECONOMY WORKER
Job security, “seems to be a big issue in Alberta, where unemployment is very high,” says Ficek. His firm recently prepared a financial plan for a single woman working in the fossil fuel industry. She worries about her ability to pay her mortgage if a recession hits and she is laid off. Let’s call her Niki.
Niki’s priorities are contributing to her RRSP and her emergency fund, Ficek adds.
Her RRSP is used for long-term savings. She uses the TFSA, which sits in cash or a GIC, for her emergency fund and for short-term savings. If there is another recession and Niki loses her job, says Ficek, “she could access that TFSA money and not incur any kind of penalty.”
Unreliable employment is not a problem that only affects Albertans. Demand for contract employment is on the rise, from blue collar workers to highly skilled IT professionals, according to a BMO study.
“Sometimes gig economy workers are flush with more work than they can handle and other times they may be out of work for a prolonged period of time,” adds Benz. “You need a large emergency fund if you’re in the gig economy because you need to provide for yourself in those periods when your income is shallow.”
Benz recommends saving enough to cover nine to 12 months of necessities (e.g. rent, utilities, food) instead of the usual six months. “The last thing that you’d want is that you’d be forced to turn to credit cards or other unattractive forms of financing to get you through your basic living expenses.”
SCENARIO 2: TWO-INCOME HOUSEHOLD, WITH DEPENDANT
“In another example, take a couple but assume that the mother does not stay at home and continues working,” after maternity leave, says Ficek. “There would be more money to go around and the family would probably already have an emergency fund. First, they should be contributing to an RRSP,” he says.
“The TFSA can be used for any purpose: anywhere from emergency funds to short-term savings to long-term savings to retirement planning, so [what it’s used for] really depends on the situation,” Ficek adds. In this scenario, he continues, the TFSA should be used as a longer-term savings vehicle and funds in the TFSA should be allocated, “according to the risk tolerance and time horizons of the clients.”
Ficek says that “the majority of [our] clients use TFSAs for long-term planning rather than short-term planning. They would allocate the TFSA into different investment funds and save for retirement without actually needing to dip into that TFSA.”
When saving for children’s education, Ficek says, “At the very minimum, we try to encourage parents to at least put in the amount that will attract government grants. It’s a small amount: $2,500 per child per year. We generally do not encourage putting more money into the RESP.”
Benz recommends parents use a retirement calculator to keep track of their long-term savings plan. “If things are looking really tight, that suggests that you’d want to take a light touch with regard to college savings and prioritize retirement instead...The sad fact is that you have many fewer levers if for some reason you’re forced to retire and you don’t have enough assets. You can’t get a loan for retirement, whereas your child could readily get a loan to pay for college.”
For expectant parents in Canada, there are three different types of leave: pregnancy leave (unpaid), maternity leave and parental leave. Anyone in this position should be aware of the benefits available and how to apply for them.
While making sound investment decisions can be difficult for those in their 30s, there’s an upside to taking the challenge seriously. “You have to take comfort in knowing that you’re living within your means and knowing that you’re prioritizing your future,” says Benz. “If you do that for long enough, it gets easier, because you see your nest egg grow and that provides a ton of comfort and peace of mind.”
