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Millennials breaking investing stereotypes with conservative approaches to RRSPs

In two years, the average millennial’s RRSP holding has jumped 87 per cent

By Victor Ferreira

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Millennials are not the overconfident, short-sighted investors portrayed in stereotypes — and the way they’re tackling their RRSPs proves it, according to two experts.

Instead of pumping thousands into cryptocurrency, new BMO data suggests that millennials are focusing on contributing to their RRSPs instead. Since 2016, according to the bank’s Ninth Annual RRSP Study, the average millennial’s RRSP holdings have increased by 87 per cent to $28,821.

Kyle Westhaver, a financial advisor for Toronto-based firm Nicola Wealth Management, said his millennial clients have proven to have an “eye for savings.”

“They’re not all overconfident investors who are eating too much avocado toast to buy a home,” Westhaver said. “A lot of the younger clients I have … invested more conservatively (than investors of other ages).”

Westhaver said his clients instead often ask him about diversifying the investments they put in their RRSPs and aren’t as interested in the traditional portfolio split of 60 per cent in stocks and 40 per cent in fixed income. Millennials, according to Westhaver, are more interested in alternative investments in real estate, private equity and private debt.

The shift toward focusing on RRSPs, according to BMO Global Asset Management portfolio manager Rob Armstrong, suggests that “millennials are starting to become adults.” Millennials still haven’t had a lot of experience with investments, but after being in the job market for a few years, some are finally securing jobs in their chosen fields and with it, significant pay bumps.

“That allows them to explore beyond a tax-free savings account,” said Armstrong, who added that in the past, tax-free savings accounts took “a lot of money off the table for RRSPs.” But BMO’s data suggests a shift back to the norm is occurring.

Like Westhaver, Armstrong doesn’t see millennials making many risky investments. The bulk of their RRSPs — two thirds — is actually in cash, Armstrong said. A possible reason for this might be that they’re attempting to take advantage of the Home Buyers’ Plan, which allows a $25,000 withdrawal from an RRSP to pay for a first home. Unless the amount withdrawn exceeds $25,000, it is not reported as income.

While investing the cash in stocks might help them reach their goals sooner, Armstrong said millennials have tended to shy away from this option, looking to minimize any risk of losing their savings.

“If you’re planning to buy a house in the next year, sometimes you don’t need that market risk (when you can) have it sitting on the side so you’re still getting a little bit of interest but ready for an opportunity does make sense,” he said.

BMO does not have data about which age groups are using the Home Buyers’ Plan, but Westhaver said a majority of his clients who have bought a home in the past year have withdrawn the limit from their RRSPs — or as close to it as they can get. “That’s an easy win,” he said.

After using their RRSPs to fund the purchase of their first home, the next step is to begin thinking about retirement. The challenge for millennials is to balance that long-term goal of funding their retirement with shorter-term goals such as paying down a mortgage or paying back student debt. Focusing on paying back student loans almost always takes priority, Westhaver said.

A millennial himself, Westhaver says he faced a similar dilemma when he was trying to pay off his student loans. They were always the foremost priority, but he made sure to begin stashing whatever funds he could in his RRSP. He still proudly displays a notice on his refrigerator saying his student loan is paid off.

For those who haven’t begun investing yet, he recommends making contributing a habit by setting up automatic deposits after each paycheque.

“The first paycheque, it stings,” he said. “The second one, you feel it. By the third, it’s like it didn’t happen.”