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TORONTO (GlobeinvestorGOLD) — So many opportunities, so little money. That pretty well sums up the investment climate for Canadians in their 30s. They’ve gone from living lean in their 20s to living large with kids, mortgages, home furnishings and the day-to-day expenses of getting by in the 21st century. While the demands of retirement savings may seem overwhelming, there’s one big investment advantage for the 30-something crowd — and that’s time.
Investment opportunities that arise over the course of the decade could include paying down a mortgage or contributing to a registered retirement savings plan (RRSP), company pension, non-RRSP investment plan and/or registered education savings plans (RESP). The key to investing in your 30s is to be patient — create a solid foundation and slowly build up.
But before you start digging that foundation, there is one potential pitfall that needs to be addressed, and that’s debt. The rapid lifestyle change that usually occurs between the 20s and 30s often results in high credit card balances, a hefty mortgage, and — in some cases — outstanding student loans.
Adrian Mastracci, president of KCM Wealth Management Inc., sees a lot of 30-something clients at his Vancouver investment firm. He says many seem to want to build the second floor of their investment portfolios before completing the foundation. His first concern is getting their debt under control. “Take the highest-interest debt, and pay it off first,” he says.
High-interest debt usually means credit card balances, which often cost consumers between 18 and 30 per cent a year. Student or car loans are normally smaller, and mortgage loans right now are in the single digits. The average Canadian carries debt right into retirement, so each individual must determine their own cut-off point. You can put it in perspective by looking at debt reduction as an investment. Every dollar you put toward paying off debt at 18 per cent is like an 18-per-cent, tax-free, risk-free, return on an investment. Since that kind of investment is very rare, paying off high-interest debt will give you the best bang for your buck.
The argument for paying down a mortgage is a bit more complicated. On one hand, it’s a quicker way to build up equity in your home, but if you get carried away you could be putting all your eggs in one basket and neglecting the other support points of your investment foundation.
As the saying goes: you need money to make money. Adrian Mastracci suggests investors target 10 per cent of their income for savings, and that could involve making spending sacrifices. If you don’t already have an RRSP in your 30s, start one. It’s the best way for average Canadians to allow their savings to grow tax-free. It also provides extra cash through tax rebates, which could be used to invest further or spend on day-to-day expenses.
The key to investing in your 30s is to spread yourself wide and thin. The foundation of an RRSP portfolio should be well diversified to maximize growth and minimize risk. As a rule-of-thumb, some investment advisers suggest the percentage of fixed income in your RRSP should be equal to your age, and the rest should be in equities. So if you’re 35 years old, 65 per cent of your portfolio should be equities. That number drops as you get older, your time horizon gets shorter, and you look to lower risk.
Fixed income includes bonds, guaranteed investment certificates (GICs), money market funds, and cash. A bond portfolio should be laddered, which means maturities are spread out evenly over time so the investor can take advantage of the best yields as often as possible. The objective is to generate steady returns over time as interest rates rise and fall. True fixed-income investments are held to maturity and not traded — that way your fixed-income portfolio will always be growing no matter what happens to equity markets throughout the course of your life.
The equity portion of a 30-something portfolio depends on the individual investor, but a Canadian equity, international equity and U.S. equity fund should be staples. Adrian Mastracci suggests young investors also take a look at hedge and natural resource funds for the long-term. He says don’t worry too much about allocation, because you can adjust the weightings in each fund over time. Long-term is the key, since time is the young investor’s most abundant investment tool.
“The three ingredients to successful investing are time, capital and rate. If you have one, you don’t need to work as hard at the other two,” he says. For that reason, he cautions his 30-something clients to “appreciate the beauty of investing young" and not get too hung up on performance.
Real estate, income trusts and bond funds fall somewhere in between fixed income and equity because they are subject to capital losses but generally produce steady returns. How they are defined is up to the individual investor and his or her tolerance for risk.
Other words of advice from Adrian Mastracci: don’t invest too much in company share plans or securities related to your employer. When Enron Corp. went belly-up, many of the employees who lost their jobs were heavily invested in the company itself and lost their life savings as well.
Also, don’t get hung up on maxing out your RRSP. It’s good to leave some contribution space for your higher-income years when the tax savings are greater. Try to avoid borrowing to make your RRSP contribution, and if you’re going to borrow to invest do it in small, manageable amounts that you can repay in a short period of time.
Overloading your RRSP in your 30s could also lead to clawbacks in your Old Age Security when you retire. Advanced household financial planners may consider starting a non-RRSP savings account and paying tax on its growth each year. A non-RRSP account allows the holder to withdraw funds at any time without additional tax consequences. Still, Mr. Mastracci suggest holding off on a non-RRSP account until the mortgage is paid off.
Advanced household financial planners may also want to consider starting Register Education Savings Plans or RESPs to help finance the ballooning cost of post-secondary school education. RESPs provide the same tax shelter as RRSPs, but the federal government will provide additional grants for RESP holders. For most 30-something households trying to make ends meet RESPs are a pipedream, but Mr. Mastracci points out that grandparents can contribute (hint, hint).
In the end Mr. Mastracci considers the 30s to be a time of financial self-discovery. “Find out what kind of investor you really are, how you would evaluate risk, and how long you have to recovery if your investments fall flat,” he says. He suggests not setting stringent financial goals heading into your 40s. “If you come out of your 30s as an informed investor, you’ve come out with a good foundation".
Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.