Making $ 90,000 a year as a marketing manager, living in the downtown core and finally debt-free, Marwa finally has the life she’s always dreamed of. But at 31, she’s going through a “mid-life crisis,” and unsure of what she should be saving for.
“I am at a bit of a standstill when it comes to setting up my future life goals, so, I don’t really have any,” she writes into Millennial Money. She’s hoping that this exercise and the advice from her coach will give her the confidence she needs to pursue her next steps.
In 2017, Marwa finally paid off her $ 20,000 remaining in student loans, and three years later, she’s been keeping track of where her savings go. She has $ 10,000 in cash, $ 5,000 in her vacation savings fund, $ 5,500 in her future property investments, $ 9,000 in a TFSA and $ 1,500 in an RRSP account. Another great bonus? She has $ 30,000 in a locked-in retirement account (LIRA) from a previous employer.
But there’s no real strategy behind the way she’s saving, she admits. “I have a lot of contribution room in my TFSA and RRSP — should I focus on those? I don’t really know how to organize my finances when they aren’t goal based, however, I don’t want to screw future-me over,” she says.
A typical workday, before the COVID-19 pandemic, was walking 10 minutes to work, cutting her transportation costs. Another money saver? Because she’s “particular” about her coffee, she makes it at home and never feels tempted by the many cafes that surround her on her journey to work. Marwa also doesn’t eat breakfast, and brings lunch from home.
“I really enjoy cooking so I try to eat dinner at home during the week as well,” she adds. She admits she has gotten much better, as dining out used to be a struggle for her, but now, at most, she’ll attend one social event a week that requires her to spend money at a restaurant.
Her foodie splurge happens on the weekends, when she spends money eating at restaurants once or twice. She’ll also opt to try a fancy latte from a nearby coffee shop before meeting up with friends. “I spend a bit more on weekends because I am usually attending an event like an art or music show, going out to restaurants, or going to a movie.” If she isn’t out and about, she’ll be at home painting or drawing.
Marwa knows that she’s lucky to have her job and a place downtown where rent is only $ 1,500. Now she’s hoping a money coach can guide her in the right direction to plan for her future.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., offers some clarity to Marwa.
“If 31-year-old Marwa is going through a mid-life crisis, I guess I’m in my golden years at 41,” Heath jokes. “But seriously, it can be tough to figure out what you’re saving for when you don’t fit into a certain ‘profile,’ like being married with a mortgage with kids and a poodle. It’s OK to save generally for the future, and re-evaluate at potential inflection points like marriage and starting a family, if and when those life events happen.”
> One motivation to forgo spending today to save for the future is to try to imagine doing things you like — lattes, concerts, vacations — in the future. A dollar saved today could be two dollars in 10 years if invested at a 7 per cent return (14 years at 5 per cent, 23 years at 3 per cent). If you don’t save today, you may not be able to do some of the things you like today in the future. It used to be easy when more workers were covered by defined benefit pension plans that replaced your income in retirement. Now savers need to save proactively to fund retirement — a retirement that could last much longer than it used to as life expectancies increase.
> A gap for Marwa is insurance. She appears to have tenant insurance for her rental, but no personal insurance. She doesn’t have dependants, so life insurance isn’t that important. But disability insurance to replace her income if she can’t work is something Marwa should look to address. She may be covered at work, but work plans, if you have one, often fall short of fully replacing your income.
> Marwa appears to have good cash flow, estimated at more than $ 2,000 per month in saving potential. She should consider RRSP contributions as her income is fairly high. She is in a 34 per cent marginal tax bracket, and a $ 10,000 contribution could save her more than $ 3,000 in tax. Though she doesn’t have immediate plans to buy a home, up to $ 35,000 could be withdrawn from her RRSP to fund an eligible home purchase.
> Her TFSA is a good place for any excess savings given she has no debt and the subsequent income earned is tax-free.
> Marwa’s LIRA cannot be used for the Home Buyers’ Plan, nor can withdrawals generally be taken until she is 55 (exceptions like severe financial hardship or shortened life expectancy aside). As such, she should have as aggressive an asset allocation as she can because with 25 years of runway, stock exposure will help grow that retirement nest egg. Low fees are important to make sure she keeps as much of her investment return as possible. Beware high-fee mutual funds.
> Her RRSP and TFSA should be invested more conservatively, given she could need those for a home purchase or other mid-life events.
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Results: Improved! Week 1 vs. Week 2
What she thought: “My spending was more mindful,” Marwa says. This week, there were a couple of one-off purchases, including a donation to a COVID-19 fund and Amazon order for her mom. “Other than that, I was reasonable in spending. I didn’t eat out or spend frivolously as much as I normally would.”
Takeaways: Millennial Money helped Marwa think about what she’d want in the future, she says. “The ‘present-me’ can help ‘future-me’ out greatly with some patience.” Marwa also decided to reach out to her insurance provider for a quote on a long-term disability coverage top-up. “I do have long-term disability coverage through work, but it is fairly basic.”
Unfortunately, Marwa just missed the 2019 RRSP contribution deadline but says she’s aiming to increase her contributions in 2020. “I’ve reorganized my monthly savings contributions to focus on my RRSP and TFSA.” In addition to that, she’s registered for a self-directed platform and has started to learn about creating my asset allocation strategy.
Finally, with Heath’s advice, Marwa has learned that she can invest funds in her LIRA. “I thought it just had to sit there and do nothing until I turned 55. I feel better about not having concrete investment goals yet because I can focus on preparing myself for success in retirement,” she adds.