The logical progression of things used to be, go to college, get a good job, buy a home and then start saving for retirement. Along the way you might have a kid or two that might put a blimp in your timeline, but thing still moved forward more or less as expected. For the Gen Y crowd that progression may not be so easy. The cost of living, lower wages as compared to that cost of living and the price of getting into a home are all higher than in even the generation before. Compare that to half a century ago and the differences really stand out.
The big decision is whether to put your priorities in a home or in saving for retirement. If you are in your 20s or 30s you may not even be thinking about retirement, after all that’s almost a half-century away. But do consider it. Fifty years ago employers hired someone and that person stayed with the firm for most if not all of their working life. Then they were rewarded with a pension to get them through their golden years. That doesn’t happen much anymore.
Employers are thinking short term, hiring on a contract basis rather than for full time work. And if you’re thinking of depending on a government pension, well don’t. All you have to do is listen to the cat fights in Washington DC about doing away with Social Security and you see where that wind might eventually blow. Will Canada end up having similar ideas? Who knows?
Now let’s look at the home buying situation. Prices are steadily increasing but interest rates, so far, are the lowest they’ve ever been. Based on the average price of a home in Canada you’ll need between $25,000 and $30,000 to cover the mandatory 5 percent down. If you plan on living in Vancouver, Calgary or Toronto add another $5,000 to $15,000 to that figure. It may take you a decade to save up that kind of a down payment depending on your salary. If you have student loans to pay off, plan on it taking longer.
But there is one way to gain a tax advantage in buying a home if you have an RRSP account. That is a registered retirement savings plan that allows for tax free savings on a portion of your income each year. RRSPs have a Home Buyer Plan that allows you to pull up to $25,000 from that plan without penalty if it is used to buy a home. The money also has to be paid back within 15 years to avoid penalty. If both you and your spouse have accounts and decide to go that route then you have $50,000 to use towards a home.
Additional tax savings are possible if you tweak the system, so to speak. This works if you know you are buying a home and if you already have sufficient funds in your RRSP. Take $25,000 from your regular savings and put it into the RRSP, then withdraw $25,000 for the down payment. You must have had at least $25,000 in the account already for at least 90 days for this to work. The actual savings on your taxes will depend on your tax bracket.
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