Friday, March 1st, 2019
A lot of thought usually goes into buying a home — especially your first one. And one of the biggest things to sort out up-front is how much your down payment is going to be, and where it's going to come from.
You're probably emptying most of your own savings, maybe hoping for a gift from your parents or relatives, and you also might be thinking of using the Home Buyers' Plan (HBP) to withdraw from your RRSP/RSPs. That last one, though, comes with a few additional considerations, such as your ability to repay your required amount, and how best to invest your repayments.
When you start repaying your HBP withdrawal, it's important to spend some time thinking about your long-term goals and objectives for your RRSP/RSP. Initially, your RRSP/RSP was a place to save for your down payment, but since that goal has now been achieved, you should consider your new objectives, including your investment time horizon and return requirements needed to reach your new RRSP/RSP goal, which is retirement.
Part of that plan includes thinking about what types of products make the most sense. For many people, the initial home purchase will take place early in their careers, meaning they'll still be working for 20, 30, even 40 more years before retiring and starting to draw on that RRSP/RSP.
Given an investment time horizon of 20 plus years, your options are wide open. This is a good thing! It means you can invest in long-term investments with greater return potential, such as mutual funds or other market-based investments.
In my experience, though, most of us are creatures of habit and follow the path of least resistance — which results in many people simply repaying their HBP withdrawal into the same account and investment that they withdrew it from.
The thing is, when you were saving for your home, you were probably investing in a short-term product like a savings account, whereas now that you're in repayment mode, you're saving for a much longer-term goal like retirement. That's why it's important to consider how best to re-invest that HBP repayment. In most cases, a short-term product like a savings account isn't the best long-term investment solution to help you build wealth for your retirement.
It makes it remarkably easy to figure out your asset mix.
It goes like this: for your retirement portfolio, hold your age in fixed-income securities (like bonds), and the rest in equities (stocks). So this means if you're 40, your retirement portfolio should be approximately 40% bonds / 60% stocks.
This rule of thumb means that as you get older, you're gradually decreasing your stock exposure and increasing your bond exposure, which results in a more conservative portfolio as you near — and enter — retirement.
The risk if you don't think about your investment mix is that you run the risk of losing out on the opportunity of compounding returns. If you repay your HBP into a short-term cash investment making a bit of interest, you likely won't have enough growth to reach your retirement goal.
So this is the time to consider what types of investments will give you the best chance of reaching your goals. In all likelihood, your best bet will be a balanced investment portfolio that you make monthly contributions to, with a combination of equity and fixed-income investments, which should provide you with the combination of growth and diversification you'll need to retire comfortably.