Generations Building Wealth Differently

Geoff Currier & Evelyn Jacks

Can Canadians build wealth in the current economic environment? Over the longer term?  After taxes?  These are important questions anytime but particularly at election time.  The traditional way to build wealth for Canadians families has been to buy a home, pay it off and even leverage the equity to borrow money to invest in the financial markets.  These wealth building exercises occur over a lifetime.  But today, new generations are building wealth differently.

Two Generations’ Wealth Building Basics.  The traditional cornerstone of wealth – the principal residence – was the first “go to” strategy for most people in the Boomer and GenX generations.   As the years go by, the house increases in value and helps create wealth for the homeowners and their heirs, especially because subsequent dispositions of a qualifying principal residence was reliably tax exempt.

This has been the Baby Boomer model, and it has generally worked for that generation. Home ownership was more or less an expectation.  Boomers have also been contributors to RRSP’s, company pension plans and other savings vehicles.

Some who have followed in the footsteps of the Boomers, the Gen X’ers, have also done well. According to StatsCan’s Financial Survey for 2023, “Canadians aged 55-64 who have a principal residence, and an employer-sponsored pension plan have a median net worth of $1.4 million.”

There is enormous disparity in this age demo, however.  Canadians in the same age group who have rented and do not have an employer-sponsored pension plan report a net worth of just under $12,000.  Taking a good job with a pension and staying with that over the longer term works to build wealth; that effort is amplified when you add homeownership to the equation.

More Than One Way to Save: The traditional viewpoint has been that paying off the mortgage as quickly as possible is the best strategy. Opinions are mixed on this point, though. If your mortgage rate is low enough some of your cash might be better used in a fund that generates more interest than you currently pay on your mortgage. Any decision your clients make about this needs to be carefully calculated. 

Rather than advising your clients to put all of their money into the mortgage basket, doing a few things consistently is a sounder plan for long term financial stability. If buying a house isn’t in the cards in the short term, making use of the First Home Savings Account (FHSA) is a solid way to save. This is true for older people as well, if they  haven’t lived in a home in the current year or the immediately 4 preceding years.

The RRSP will save tax dollars, and increase refundable and non-refundable tax credits as well as other social benefits, too.  In other words, a well diversified, tax efficient savings strategy will help Canadians keep more and save more for the future.  That’s the basic tax facts older generations have come to know and rely on.

New Strategies: Unlike the days when Boomers and Gen X’ers entered the workforce expecting to own a home, some younger Canadians have found that, depending on where they live, owning a home is an unrealistic goal. Nevertheless, they are finding ways to accumulate wealth. StatsCan offers some encouraging news on that front. 

“Among young families who rented their principal residence and who had no employer pension plan, 15% had net worth greater than $150,000 in 2023, compared to 5% in 2019. Members of this group commonly held assets in real estate that was not their principal residence (median = $350,000); Registered Retirement Savings Plans (RRSPs) (median = $35,000); or Tax-Free Savings Accounts (TFSAs) (median = $20,000).”

The First Home Savings Account, emerging April 1, 2023 has added to this wealth accumulation activity as well.  As of November of 2024, close to a million Canadians had opened a FHSA.  Up to $8000 can be contributed annually for a lifetime maximum of $40,000.

These numbers reflect a growing level of financial literacy among younger workers. However, there is much more to be done in order to convince those who are either entering the workforce or are in the early stages of their working lives, to find ways to set aside money for their future.

If your clients are not enrolled in a pension plan, encourage them to sign up if their employers offer one. The FHSA is an excellent way to reduce taxable income and save for that first home, if that’s the ambition. If not, RRSP’s offer a wide variety of options to reduce taxable income and generate wealth. The Tax Free Savings Account (TFSA) is an excellent avenue for building up the cash that will be needed when the working days are done. Even small amounts of money, contributed early, will go to work for your clients and over time they will see the benefits. 

To Buy A Home? Returning to the question of whether or not purchasing and paying off a home is still the ideal way to generate wealth for one’s retirement years, the answer is, it depends. If your client is a Boomer or a Gen X’er and plans to remain in the home in retirement the home provides no cash. To the contrary, property taxes and home maintenance will still need to be accounted for. 

If, however, the client sells the home and elects to use the proceeds to downsize or rent, that cash can be of great benefit. Some will find themselves forced into a senior’s residence or assisted living facility in which case the sale of the house may be needed to finance those accommodations. 

The Bottom Line: Millennials or Generation Z must understand that they too will age, and they will need to prepare for that day. A small contribution to several funds will reduce taxes and make money for your clients. 

Teaching your clients the importance of financial literacy ,might be the greatest service you can provide. The Knowledge Bureau has just the tools for young Canadians to learn how to protect and grow their own money. StatsCan tells us that 15% of young Canadians are well on their way to building a solid nest egg, but that means 85% are not on that path. We still have much work to do.

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