Engaging the next generation

At the end of November we held our launch event for NextWave, Newport Private Wealth’s initiative for young adults to help them become better equipped at managing wealth.

We had a tremendous turnout with over 40 young adults in attendance for an evening of networking and a brief introduction to the concept of NextWave, as well as introductory topics that will lead into our future events. Feedback from attendees was enthusiastic: “These are exactly the kinds of questions I have but I don’t know who to talk to” and “I was so happy that I actually understood what you were talking about because I feel totally underprepared when it comes to financials”.

The feedback confirmed our belief that there is a strong desire to learn. Young adults want to take more responsibility, but with little in hard financial assets early in their careers they feel like they don’t have access to qualified individuals to discuss their concerns.

For those individuals who expressed interest but couldn’t make it and those who would like to attend future events we wanted to provide a quick recap below on a few of the topics discussed:

Our Environment is Different

Basic rules of thumb that may have worked for the Baby Boom generation might not be as relevant for young adults today.  Adages such as, “If you’re young you have a long time horizon so put all your money in equities” and “Buy a starter home young and build your equity” aren’t the prescription they once were. Baby Boomers enjoyed the largest bull market in history from 1982-2000 which coincided with their asset accumulation years. Since 2000, we have been in a more common sideways market, the fourth since the early 1900’s. These sideways markets have lasted between 12-18 years historically, and during their occurrence provide less upside for a heavily concentrated stock portfolio.

The housing market, especially here in Toronto, has provided very good returns for the last 25 years, outpacing both inflation and growth in average annual income. But with annual incomes failing to keep pace, affordability for many young adults has been drastically reduced.

A tougher job market means young adults are staying in school longer in pursuit of higher education. Since we are spending more time and money getting better educated we just don’t want any job – we want one we’ll enjoy and often change jobs frequently early in our careers to find it. More education means starting careers later in life. This, coupled with having more women in the workforce, has meant a delay in starting families. All of these factors have reduced the desire for home ownership as we aren’t “settled” until later in our lives where home ownership makes sense.

Gift vs. Entitlement

The popular media has done an excellent job portraying a massive transfer of wealth as the Baby Boomers get older and bequeath this wealth to the next generation. We don’t believe this scenario will play out for many reasons: Baby Boomers savings have been hurt in the last decade, earning much less than originally expected; they are living longer and will have more years of retirement; are facing increasing health care costs; they have much more desire for charitable giving than previous generations.

Many Baby Boomers feel more inclined to provide financial support and gifts earlier in their children’s lives rather than simply leaving an inheritance. Often they are providing “catalyst funding” a term we use here at Newport Private Wealth to describe ways in which parents can provide financial support to assist or accelerate the achievement of their children’s goals. Catalyst funding helps children establish financial independence and includes things like:

• Private school educations
• Graduating from university debt free
• Capital to fund a business
• Lifestyle support early in their careers (car, rent, etc.)

These types of financial gifts follow the line of thinking of, arguably the greatest investor of all time, Warren Buffet, who when asked how much you should leave children and responded with, “Enough money so they would feel they could do anything, but not so much that they could do nothing.”

Young adults who have been fortunate enough to receive catalyst funding or outright financial gifts need to think of it as just that, a gift, and need a plan to maximize how they use it to springboard themselves to financial independence. Setting financial goals, understanding your expenses, and planning how to save for big life expenses (car, wedding, house, etc.) will take you much farther than playing the inheritance lottery and hoping for a windfall.

RRSP & TFSA

“A rose by any other name would smell as sweet” – William Shakespeare’s Romeo and Juliet

Registered Retirement Savings Plan (RRSP) might possibly be the worst name for enticing a young adult to save.

Retirement is usually the last thing on a young adult’s mind when thinking about saving. More immediate priorities exist like saving for a car, a wedding, first home or going back to school. Young adults often don’t contribute to RRSPs for these reasons. Yet in reality, the two most common savings priorities — education or your first home – are made easier with an RRSP. Under the Lifelong Learning Plan and the Home Buyers’ Plan, plan holders can dip into their RRSPs and withdraw money tax-free to put toward either of these spending priorities.

Young adults that aren’t taking advantage of employer RRSP matching programs because they don’t have “extra money to put away for retirement” are also giving up a part of their compensation package. This is typically because they don’t understand the different ways in which RRSPs are well suited to help young adults save.

What if you need to save money for non-retirement purchases that aren’t education or housing related? In this situation, the Tax Free Savings Account (TFSA) is the savings vehicle of choice because although there is no tax deduction for contributions, you can withdraw money at any time tax free for any reason.

The main point is that not understanding the vehicles available to you is not an excuse to not be saving. It doesn’t matter if you are saving a lot or a little, simply having a budget and the will to save towards a financial goal is what matters. No matter your level of savings there is an advisor who is willing to work with you and help you reach your goals. Being too nervous to invest and just leaving your savings in cash is one way to ensure you lose your purchasing power through inflation.

Future Events

That’s just a glimpse of what was discussed at our first NextWave event. For those interested we encourage you to contact us for a more detailed account.

A list of some of the topics for future events is listed in our previous blog Filling the knowledge gap for the young affluent. If you are interested in learning more about NextWave or your adult child wishes to attend future events, please contact Caitlin (cchapman@newportprivatewealth.ca) or myself (kdean@newportprivatewealth.ca) and join our LinkedIn group to ensure you are aware of upcoming events.