Tailoring your finances to your life stage.
You don’t want the same things today that you wanted 10 years ago (I’ve personally wiped 2012 from memory) and in 25 years, your priorities will shift again. That’s why it’s important to reassess your financial goals at each life stage you enter and iterate your investment strategies to match. For example, it doesn’t really make sense for a new grad to liquidate their portfolio or for a retiree to focus on high-risk investments.
Stick around while we walk you through four major life stages and the investment strategies that best support each one.
P.S. Buying your first home at 50? Amazing. Living a child-free life? Love it. You don’t need to have any specific goals at any specific age – mix and match to your heart’s content. These tips are all about living *your* best life.
What you’re up to: Starting a career, paying rent, travel
Financial priority: Building wealth for the future, planning your finances
At this stage, you have time on your side (and potentially less family obligations).
While you may not have a high income, investing small amounts consistently can help you prepare for important future expenses – like a house and retirement. Say it with me: it’s never too early to start a retirement fund.
Opening a registered savings account
Before you start saving or investing, it’s best to make an informed decision about which account(s) to contribute to.
Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) are both great accounts for holding savings and investments long term; these accounts allow you to accumulate interest and other investment income tax free. Just keep in mind there’s a limit on how much you can contribute each year.
RRSPs were created by the Canada Revenue Agency (CRA) with the specific purpose of helping Canadians save for retirement. Your contributions count as tax write-offs, although your withdrawals are taxed. The idea is that if you withdraw after retirement, you’ll likely pay less tax than you’d pay at the time of contribution, since your tax bracket will be lower.
It’s also possible to use your RRSP to save for a down payment. A program called the Home Buyers’ Plan allows you to withdraw $35,000 from your RRSP account tax free – but you’ll have to pay back the money within 15 years. However, there are some measures in place, like withholding tax, that can deter you from making additional withdrawals from your RRSP before retirement.
On the other hand, TFSAs are not tax-deferred (you contribute income after tax and can’t use contributions as a write-off) but they’re also extremely flexible and easy to withdraw from. When you open an account with Flahmingo, you’re actually opening a TFSA! You can learn more about TFSAs right here.
Last but not least – in 2022, the Canadian government announced a new tax-free account called the First Home Savings Account (FHSA). This account allows Canadians to save up to $40,000 towards their first home. Like an RRSP, contributions count as a tax deduction and investment income can grow in the account tax free – but FHSA funds can also be withdrawn without paying tax, just like a TFSA. This account is a great option if you’re saving/investing for your first home!
At this point in your life, you may be more open to risk. The longer term your investment is, the more time you have to recover from potential losses – and retirement is many years away.
While all investments have risk attached, some have bigger potential wins and losses than others. For example, investing in stocks from early-stage companies could mean a big payout in the future (think about early investors in Apple or Amazon), but these high-growth stocks may be less stable than a huge, established company – meaning you could end up with a loss.
Different asset classes (a.k.a. types of investments) can also be riskier than others – for example, exchange-traded funds (ETFs) are usually considered relatively low-risk due to being naturally diversified (your money is invested in many different stocks, not just one).
Considering specific investment goals and timelines is a helpful first step when determining how much risk to take on. Keep in mind that a portion of your funds should always be easily accessible for emergencies or for large expenses in the short term (like a vacation). This might mean having cash savings on hand and dedicating part of your portfolio to less volatile investments.
Young family/early career
What you’re up to: Buying a home, starting a family, career development
Financial priority: Paying for big-ticket items and daily expenses while continuing to save for retirement
Let me paint you a picture: big things are happening, like home ownership or tying the knot or adopting a pup. And if you’re planning on having kids, that could be on the horizon too.
Finances in a relationship
This period in your life might mean handling finances together with your partner, perhaps for the first time. You’ll have to decide whether to combine your finances by opening joint accounts, keeping finances separate, or meeting in the middle with only some expenses (like rent) paid out of a joint account.
You’re likely working toward common goals – so consider how to work together! For example, while you can’t technically contribute to your partner’s TFSA, you can gift funds for them to contribute themselves if they have TFSA contribution room and you’re maxed out. This can maximize the amount you save tax free as a couple.
We’ve already covered the logic of investing for short- vs. long-term goals. With big expenses (maybe a house or wedding) coming up, you might want to shift part of your portfolio to more stable investments – those low risk, dependable options that are less likely to experience a sudden drop right before you need your down payment. Think about it this way: stability is best for funds you’ll need right away.
Decide which accounts you’ll be withdrawing from to fund these purchases – TFSA, RRSP, FHSA or something else – and adjust accordingly.
That said, time is still on your side when it comes to retirement. Experts advise reserving part of your portfolio for the high-return investments we talked about earlier.
Peak earning years
What you’re up to: Career seniority, family life, paying down debt
Financial priority: Keeping up with day-to-day expenses, becoming retirement ready.
These are the years when you’ve likely hit your peak earning potential, you’ve settled into your lifestyle (whether that’s family life or being the jet-setting aunt) and many major costs have been handled (house, education, etc.). While you may have larger day-to-day expenses, you’re also earning more – so having a clear and attainable financial plan will make all the difference at this stage.
Paying down debt
Your prime working years are a good time to focus on paying off your mortgage, student loans etc. – you don’t want to carry that debt into retirement.
The first step to paying down debt is figuring out exactly what you owe. It’s also a good rule of thumb to prioritize high-interest debt first.
However, keep in mind that it’s best to strike a balance between paying down debt and contributing to your emergency and/or retirement fund.
You may start this stage with a portfolio that looks similar to the previous two stages. However, as you near the end of this stage – and get closer to retirement – it could be a good idea to start dialing back on risk.
You want to avoid major losses since there will be less time to recover from them. Many investors will choose a more conservative portfolio during these later years. Some experts even advise investing in dividend-paying stocks in the years closer to retirement, since these could be a great way to supplement your income.
What you’re up to: Spending your hard-earned money
Financial priority: Maintaining income, estate planning
This is the part where you actually access those retirement funds. You may also earn an income from the Canadian Pension Plan (CPP), which you can start receiving beginning at 60.
Withdrawing from your RRSP
Did you know you can only hold funds in an RRSP until you turn 71? There are actually a few different ways to receive income from your RRSP once you’re ready to withdraw.
- You can transfer your funds to a registered retirement income fund (RRIF), which can hold investments just like an RRSP. This account deposits a minimum amount into your account annually, like a salary, which is taxed as income.
- You can purchase an annuity, which pays you a guaranteed income. These are sold by insurance providers and other financial organizations.
Retired investors are usually focused on maintaining their funds throughout retirement. This typically means focusing on safe and stable investments, as well as investments that can deliver an additional income stream (like dividends or interest). Investments with sufficient liquidity – meaning they can easily be withdrawn – might be another priority.
There’s no one-size guide to investing – it’s always important to do your research and consult a professional when you need them. That said, sometimes it helps to see a high-level roadmap, which is exactly what we set out to do with this article!
No matter what stage you’re at, the fundamentals usually apply: stay consistent, don’t take on more risk than you can handle, and make sure you have easy access to at least a portion of your money.