How should this young couple invest an extra $10,000 annually?

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Q. My wife Brianna, who’s 30, is a teacher. I’m 35, and work for the government. We have just completed building a new home and are expecting our first baby. While things will be tight with her going on maternity leave, we will have about $10,000 annually to invest for the next few years. What should be our order of priority for investing: RRSP, TFSA, RESP, or paying down our mortgage? We both have defined benefit pension plans. –Dario A. Dario, I’m very impressed that you’re able to put aside some money to save given everything on your plate right now. Good for you. Just please tell me you have some bad habits too. Vaping? Caramel Balsamic Swirl Ice Cream? Cheating on Marie Kondo? All kidding aside, my recommendations on how to allocate that money are pretty simple: RESP*, then TFSA*. The first $2,500 should go to your child’s Registered Education Savings Plan. You already have your basic retirement income covered off with your pension plans, so your next priority should be to take advantage of the 20% grant the government provides to RESP holders. Where else can you get a guaranteed 20% return? It is unbeatable. Choose a self-directed plan, and weight the investments towards equities, given the higher return potential and the fact that you have about 18 years before you’ll need to access the money. That time affords you the ability to weather some storms.

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The remaining $7,500 should go into a tax-free savings account (TFSA). You could leave a portion of that money in cash, to act as an emergency fund, and invest the remainder. To determine how much risk you’re willing to take, consider when you might want to access the money. If it is for a new car in three years, perhaps a GIC (or cash) is best. But, on the opposite end of the spectrum, if you’re confident that you are saving the money for your retirement, invest it in a low-cost, broadly diversified mutual fund or exchange-traded fund. I don’t recommend you put the money into your RRSP*. As you’ve mentioned, you both have defined benefit pension plans. That means your income won’t drop much in retirement, so the tax deferral of the RRSP doesn’t help you. (You’ll pay about as much tax in retirement as you would now.) You’re better to invest after-tax dollars in a TFSA* and enjoy the tax-free growth, and the simplicity of avoiding minimum withdrawals from your retirement savings, which must be converted to a registered retirement income fund (RRIF) by the time you turn 71. Those required withdrawals could tip you into higher tax brackets. I also don’t recommend using your expected $10,000 a year to pay down your mortgage principal (your lender may refer to this as a “prepayment”). The reason is that, from a math standpoint, you’ll get a better return putting the money into the equity market than you will by avoiding the mortgage interest expense, given the crazy low-interest rates we’re seeing. Who knows what will actually happen, but based on history, the stock market will rise 5% to 7% over the long term, higher than the 3% to 4% in interest you’re paying on your house. One last tip: Be prepared for the unexpected. At this point, you’re planning to put that money into investments. But you might be faced with an unexpected housing repair, more spending to raise your child, or a sudden and deep urge to blow some of it on a wild weekend in Las Vegas. Rumour has it that Drake will be taking up residency there. And Paula Abdul. And maybe even Britney (!). How great would THAT be?

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About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.

Comments Cancel reply

Cathy Cole says:

December 4, 2020 at 9:24 am

Hello Me Celery.
I am 59 years old with in excess of $500,000 in mutual funds/RRSP investments. They have been managed by an investment broker for the past 13 years.
Recently I had a discussion with a Certified Financial Planner. They impressed me with how their firm can help me clarify my retirement eligibility and to position me for my future financial needs.
My investment broker does not have CFP’s on staff. My broker said although he is not a CFP, he can help me with all my questions and provide the same service.
I have had no concerns with how my investments have been managed. Typically I hear from him every 2 months when I have excess funds in my accounts to invest.
My gut tells me I need more help navigating my retirement, such as the services offered by a CFP.

I’d very much appreciate your input.

I really enjoy the advice you provide each week on Money Matters.

Respectfully,
C. Cole

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1. MoneySense Editors says:
  
  December 15, 2020 at 7:25 am
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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