Financial advice for the young not that different than for retirees

Here is one of life's little riddles: when do newlyweds most resemble a retired couple? When they are looking at their finances.

It should come as no surprise that the fresh-out-of-the-workplace crowd is risk-averse. After all, they have just spent the last 40 years or so working and saving their pennies, so any future earning potential is minimal. That makes the retired couple — which have, according to 2005 figures from Statistics Canada, an average income of $45,000 — pretty reticent to take chances with their cash.

But what is less obvious is that the couple who have only recently jumped into the full-time workforce have the same aversion to chancy investments — or at least they should, according to Ken Huggins, an investment specialist with the Whitby, Ont., branch of the Meridian Credit Union.

"They don't have a lot of room for error," said Huggins, whose company has 44 branches across Ontario.

That's because the young couple have just begun the long savings trek toward buying a house and, in many cases, starting a family.

Sinking money into riskier monetary instruments, such as specialized mutual funds, is problematic for them since a loss would kill their ability to purchase that new home anytime soon.

Consider that the starting salary of a teacher in British Columbia is about $38,000, according to the Education Canada Network, a recruitment site for education jobs. With house prices in Canada's western-most province averaging more than $585,000, a pair of teachers would need to save aggressively in order to buy a house with an affordable mortgage.

"In a lot of cases, it is going to be difficult to do," Huggins said.

Budget basics

In many cases, the young couple have an unrealistic view of their money situation, believing they are spending less than is actually the case, Huggins said.

That is why he shies away from giving exotic investment advice to people who have just graduated from school and are starting their working lives.

Instead, a tried-and-trusty budget is the first order of business Huggins suggests.

"A lot of people don't know what they are spending or where," he said. "They are just living paycheque to paycheque."

That makes the budget an essential — albeit slightly mundane — first part of the couple's financial plan.

By getting a handle on their outlays, the younger couple will realize what spending cutbacks are necessary if they are to build an adequate financial nest egg.

As dull as grey flannel

If the newlyweds think outlining a budget is a bit boring for their go-go lifestyle, they aren't likely to be any more impressed with Huggins's next nugget of wisdom.

"Insurance at their age is pretty cheap," he said.

Buying some term life insurance to protect against the loss of either income is the smart thing to do not because of a looming death or disability but because the premiums are low at a young age.

Foe example, in January 2010, one website comparing insurance rates set the best Canadian rate at $138 per $100,000 of term life insurance for a 25-year-old. That is less than half of the $300 annual premium for a 45-year-old for the same dollar coverage.

Getting a term policy solves possible income-security issues at a minimal cost, Huggins said.

Borrowing against the RRSP

Once the young couple have figured out where their money is going and sewn up some reasonable insurance, they should take any remaining savings and put that cash into a registered retirement savings plan (RRSP).

They can even contribute to a spousal RRSP if there are disparities between their incomes, Huggins said.

The RRSP's main advantage — a federal tax deduction — is well known.

But, the couple can also borrow against the accumulated savings in their RRSPs for a down payment on a first house

Ottawa allows people to borrow as much as $25,000 of their own money without having to pay tax on the withdrawals.

But that money must be paid back into the RRSP within 15 years in order to preserve its tax-free status, Huggins said.

Still, you can effectively finance your own house down payment and cut your mortgage costs, he said.

Looking ahead

After the couple have the house situation under some control, it is then time to turn their attention to retirement.

It's never too early, Huggins says.

After all, only approximately one in three Canadians has access to a pension plan, according to Meridian.

Worse still, many people think the returns on their savings that they'll draw on in retirement will resemble the 14 or 15 per cent that investments were earning two decades ago when interest rates — and inflation — were higher, Huggins said.

"It's a culture shock," he said.

Whatever coins and bills the couple have left over can be invested in something — in fact, anything — and still get a good return by the time they retire, financial experts say.

That's the beauty of compound interest, giving your money enough time to let the percentage gains build on top of one another.

Indeed, as the young couple clip coupons on their bonds, buy insurance and watch their spending, they are looking more and more like their retired counterparts, Huggins noted.