Millennials can find financial freedom
For young people struggling with surging housing market, RRSP may help, experts say
According to an Ipsos global poll released last month, if you’re part of the millennial generation, chances are you believe your parents’ generation will have led better lives than you.
A mere 27 per cent of millennials think their lives will be better than their parents’, while 46 per cent suspect theirs will be worse. Half of participants in every age group believe that today’s youth will have a more difficult financial experience than the previous generation.
“It’s a new world in many financial respects,” Kathy Buckworth, chief family adviser for President’s Choice Financial, says. “For a millennial, job prospects are challenging, job security is becoming a thing of the past, the standard of living is rising — it can be hard to get ahead or even just get your feet planted.”
Unfortunately, job-related issues are just part of the problem. For 30year-old Trina Jasper*, a Torontobased mental-health case manager, it’s trying to break into the housing market that’s most distressing. “My husband and I work hard — we have a combined annual income of $85,000 — we live frugally and save our money, but despite this my outlook on the home purchasing process is bleak,” she says.
“We’ve been watching the housing market and saving since 2014, but seeing costs rise by at least $100,000 and more in and out of the city has made it so we can’t afford to buy right now. We’re starting to think that home ownership may not be an option for us, despite having saved $80,000-$100,000 for a down payment.”
Buckworth understands their frustrations. “More than any generation before, millennials are informed and very well aware of what’s going on in the marketplace,” she says. “It’s often a situation where they’ll look at the average price of a house in the city and feel like they’ll never be able to afford a home. Even when living on the bare minimum and cutting unnecessary things out of the budget, it can still seem daunting.”
Still, there’s hope, she says. “Sometimes starting the process of buying a home is as simple as putting your intentions into action, which involves deciphering what you can afford in terms of your comfort level, and not just what the banks tell you.”
She says that often involves sitting down with a financial planner and spelling out all the costs associated with home ownership, including property taxes, insurance, maintenance fees and the like. From there, determine what your average monthly output would be, what kind of debt you can take on and what, if any, savings you have in place for emergency purposes.
At this point, it’s also prudent to consider RRSPs. “It’s common to see millennials investing in a tax-free savings account (TFSA), which make sense for short-term savings and allows for saving and investing without paying tax on the growth when making withdrawals, but an RRSP is more likely to have an advantage over the long-term as your income grows, and especially if you’re planning on buying a home,” Buckworth says.
Why? Unlike a TFSA, taxes on an RRSP are deferred, which allows for more growth up front (providing refunds are reinvested), and you aren’t required to pay tax on the total income until you start using the funds during retirement.
Buckworth adds that another advantage of an RRSP is that saved funds can be used for a down payment on a house through the Home Buyers’ Plan (HBP), which allows a single first-time buyer to withdraw up to $25,000 tax-free from their RRSP, and up to $50,000 per couple.
While Jasper says she and her hus-
“My husband and I work hard . . . we live frugally and save our money, but despite this my outlook on the home purchasing process is bleak.” “TRINA JASPER” 30-YEAR-OLD MENTAL-HEALTH CASE MANAGER LIVING IN TORONTO
band are aware of this plan and hope to use it as part of their down payment for their eventual first home, they also don’t want to compromise their retirement nest egg and are nervous about balancing paying back withdrawn RRSP funds with carrying a mortgage.
“It’s common to have concerns or confusion surrounding how the HBP works and whether it’s the right tool for you, but this is where seeking out professional advice helps,” Buckworth says.
“I always recommend that prospective home buyers consult with a mortgage specialist to go over the fine details, such as the RRSP repayment plan, maximizing your RRSP contributions to take advantage of tax refunds and any other concerns that may come up. Having someone help you navigate and simplify the steps in this kind of purchase is so important, and will minimize a lot of the stress that comes with the homebuying process.”
*Subject’s name has been changed