Building Your Career

Congratulations, you’ve got that first job and you are now busy climbing the corporate ladder, building experience in your trade, working with entrepreneurs or start ups or maybe taking a temporary job while you still look for that perfect situation.  Some money is starting to come in but it is likely not a lot and you might still have debt from school.

The advice we gave those still in school or getting those first few jobs <See more here> still apply:

1. Try to set aside money, even a little bit ($10), each time you are paid.  You’ll start building those good investment habits.

2. Have fun!

But once you have your first “real” job you’ll often have an opportunity to participate in the best investment opportunity in Canada – hands down. And that is the Registered Retirement Savings Plan (RRSP) often with automatic deductions, with or without an employer match (explained in a moment).

Most people know that RRSPs are the primary way the government has incented Canadians to save for retirement. With fewer and fewer employees getting company sponsored pensions and the Canada Pension Plan (CPP) not offering sufficient for retirement, most Canadians have a least something invested in an RRSP.  Savvy investors have taken full advantage of them by maxing out their investments ($26,010 in 2017 or 18% of earned income) as the RRSP has several very important benefits.

1. You get immediate tax savings since the contribution drops your taxable income.  In other words, you get taxed as if you never had earned that money, often keeping you out of high tax brackets.

2. Any return on the investment you make is tax-free until withdrawal (with the idea that you’ll withdraw it in retirement when you have lower income and therefore pay lower taxes).

3. Automated deductions at source if your employee administers the RRSP. According to Statistics Canada about 40% of Canadian employees have access to an RRSP (2015) at work. When offered by the company, you can usually set up to have your investments taken out of your pay each pay period. It is much easier to save if you don’t even touch the money!

4. A company match for some employees. This final benefit is the most important of all to those of you lucky enough to have it. Many companies offer company matches to encourage saving for retirement. In this case the company will match your contributions in some way (often dollar for dollar) up to a limit (perhaps 2-3%). This contribution by your employer is free money to you, making it even more beneficial to invest if an employer match is offered.

There is no better way to invest than employer-matched RRSPs, so try to put as much as you can afford into your RRSP as early as possible. Reducing your tax rate, getting an employer match in many cases and enjoying the benefits of compound interest are powerful reasons to consider regularly investing even a small amount as early as you can. If you only do one piece of investing your whole life, try to maximize your RRSP contributions each year. If you work for 30-40 years and you do a good job of maxing out your RRSPs, you should be in good shape for retirement. For example, if you can invest $25,000/year (current maximum) in RRSPs for 40 years (25 to 65), then you’ll be sitting on a nest egg of $7.6 million dollars at age 65 (at 7%). Of course, it is very difficult to maximize RRSP contributions each year but you can see the power if you even get close to achieving this.

​

While there is no denying the value of RRSPs, things got a bit more complicated in terms of choices when the government introduced Tax-Free Savings Accounts (TFSA) in 2009. However, from the investor’s perspective, it is a good problem since the TFSA provides a second great, tax-advantaged option.

Both the TFSA and RRSP have a number of advantages but they are designed for different purposes so if you keep those purposes in mind, it will be easy to make the decision on where to make your investments. RRSPs, as described above, are strictly for retirement savings and they have many advantages including tax deductibility, tax deferment and (often) employer matching. But you need to leave the money in the RRSP until retirement or face large penalties.

The TFSA was also designed to encourage saving but has no restrictions on its use. So you can use it, for example, for saving for a house, a university education or even for retirement, but since the TFSA does not gain a tax deduction, it is generally considered to be inferior to the RRSP when investing for retirement.

So, if you can manage it, maxing out both your TFSA and RRSP is certainly the best approach. But, sadly, most of us can’t afford to put that much money aside when we are just starting out, and allocating between the two is a decision based on individual circumstances.  For example, for a person with a company RRSP match who has no short term plans to purchase a house, overweighting the RRSP would likely be the most common recommendation by a financial advisor.  However, for someone who is planning on buy their dream home in a few years, putting the money in a TFSA and forgoing investments in the RRSP probably makes the most sense. Your financial advisor can help you here depending on your specific circumstances.

​

In terms of investment types, your investment horizon (the time you will likely hold your investments) is very long, typically decades. Therefore, your portfolio at this time in your life should be very heavily weighted to equities (stocks) as they have always appreciated the most over a long period of time. For more about asset allocation over your life, click here.

In terms of how to invest, given you are now likely making more money, you’ll have some options on who to invest, either with mutual funds or sometimes through the direct purchase of individual stocks.  Bear in mind the risks when you don’t achieve sufficient diversification, as explained here.  In short, to lower your risk over time it is advisable to own a small amount of many stocks, rather than a large amount of a few stocks. This can be achieved by buying a large number of individual stocks or investing in a mutual fund.