If you’re under 40 and only starting to invest now, there are plenty of reasons why you might have waited. Maybe you’ve been focused on paying down a mortgage, raising children, finishing graduate school, or getting established in your career.
Life can also throw unexpected challenges your way, whether that’s caring for an ill family member, navigating a divorce, or dealing with a prolonged period of unemployment.
Whatever the reason, I don’t think you should feel discouraged about starting later than you originally planned. You still have decades of potential compounding ahead of you, along with several useful financial tools available to Canadians.
And while choosing the right stocks or exchange-traded funds (ETFs) matters, I think the accounts you use and the order in which you fund them can be just as important. Here’s how I’d approach it.
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Start with an emergency fund
Before investing aggressively, I’d make sure you have a proper emergency fund. The conventional recommendation is six months of essential living expenses, but I prefer at least a full year, especially if you have dependants, a mortgage, or uncertain employment. For someone spending $3,000 monthly on necessities, that means targeting $18,000 initially and eventually working toward $36,000.
Keep this money somewhere liquid and relatively safe, such as a high-interest savings account. I wouldn’t put it into stocks, since a market downturn could coincide with the exact moment you need the money. You don’t necessarily need to finish building a 12-month reserve before investing anything. But establishing a meaningful cash buffer should be an early priority.
Capture your employer’s contribution match
Next, I’d check whether your employer offers a retirement savings matching program. Some employers match contributions to a group Registered Retirement Savings Plan (RRSP) or a defined contribution pension plan, up to a specified percentage of your salary.
For example, suppose your employer matches contributions dollar for dollar up to 4% of your $80,000 annual salary. Contributing $3,200 yourself would unlock another $3,200 from your employer, effectively doubling the amount going into your retirement savings.
That’s an unusually attractive benefit, and I’d generally prioritize capturing the full available match before making additional discretionary investments elsewhere. Just review the plan’s fees, vesting rules, and withdrawal restrictions beforehand.
Choose between the RRSP, FHSA, and TFSA
Once you’ve established an emergency reserve and captured your employer match, the next decision is where to direct additional savings. For Canadians under 40, I’d focus on two registered accounts.
The Tax-Free Savings Account (TFSA) is arguably the most flexible. Contributions aren’t tax-deductible, but investment growth and qualifying withdrawals are tax-free. That makes it useful for retirement, medium-term goals, or other expenses where you might eventually need access to your money.
The RRSP works differently. Contributions are generally deductible against taxable income, investments grow tax-deferred, and withdrawals are taxable. I tend to favour RRSP contributions when you’re in a relatively high tax bracket today and expect to withdraw the money at a lower tax rate in retirement.
Regardless of the account, for someone around 40 investing primarily for retirement, I think an all-in-one asset allocation ETF like the Vanguard Growth ETF Portfolio (TSX: VGRO) is a reasonable starting point.
It holds approximately 80% stocks and 20% bonds, providing diversified growth potential with some fixed-income exposure to help moderate volatility. It is also affordable at a 0.22% expense ratio. Of course, your mileage may vary. The appropriate allocation depends on your risk tolerance, financial stability, and when you’ll need the money.
