In your 20s, financial decisions often feel like a tug of war. Should you channel savings and investments towards retirement that you will not touch for decades, or focus on building a downpayment before home prices move further out of reach? Both options carry long-term consequences, and choosing one over the other can feel overwhelming.

Retirement savings have a clear advantage; the earlier you start, the more time your money has to compound and grow. Even modest deposits can grow into something substantial by your 60s. Housing, on the other hand, is under unique pressure in Canada. Delaying too long can mean spending years renting in a market where rents climb faster than wages. Fortunately, Canadians have flexible tools, such as the First Home Savings Account (FHSA), the RRSP Home Buyers’ Plan (HBP), and the TFSA, to help balance these goals.

We’ll explore the trade-offs between retirement savings and a downpayment in your 20s, with strategies to help you protect both your near-term housing plans and your long-term retirement security. However, no single financial strategy, whether for homeownership or retirement planning, can work for everyone, as each person’s financial situation and circumstances are unique and will always require the guidance of a licensed professional. 

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Key Takeaways

• Early retirement contributions build momentum through compound growth, even if the deposits are small.
• Housing supply shortages and rising rents mean that delaying a purchase can create a cash flow trap.
• The most effective approach often combines both goals, utilizing FHSA, TFSA, and RRSP HBP in tandem for added flexibility.

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The Dilemma Young Canadians Face

For most people in their 20s, there is no shortage of financial priorities: paying down student loans, covering rent, saving for travel, or just managing inflation on everyday costs. In this context, setting aside hundreds of dollars a month for retirement or a home can feel unrealistic. Yet ignoring both goals is risky.

As the Bank of Canada explains, “High inflation means that prices are climbing quickly. Purchasing power weakens.” That applies to groceries, rent, and eventually your retirement income if savings do not keep up. Choosing where to start is less about the perfect answer and more about creating a plan that keeps your money working for you.

Why Starting Retirement Savings Early Matters

The earlier you start, the less heavy lifting you need to do later, as the magic of compounding interest is that money earns returns, and those returns earn more returns over time. Someone who saves just $100 a month beginning at age 22 can often accumulate more than someone saving $300 a month starting at 35.

RRSP and TFSA Basics for a Long Horizon

The Registered Retirement Savings Plan (RRSP) is the classic tax-deferred account. Contributions reduce your taxable income now, and withdrawals are taxed later, usually when your income is lower. The Tax-Free Savings Account (TFSA) flips that around. You contribute after tax, but growth and withdrawals are entirely tax-free. Many Canadians in their 20s use TFSAs as “catch-all” savings because the money can later go toward retirement, a downpayment, or even travel without tax penalties.

Timing and Lifestyle While Life Is Unpredictable

Financial plans rarely unfold exactly as expected. You might meet a partner who already owns a home, or you could pay off a mortgage earlier than planned and suddenly free up more cash for retirement savings. Travel may feel easier in your 20s than decades later, when health or world events could limit your options, so directing some money toward multiple goals at once can be worthwhile. The key is to stay flexible rather than chasing a perfect formula, since circumstances and priorities will shift over time.

Travel is often cheaper and easier when you are younger. Health limitations could make those dream trips harder to enjoy in the years to come. Retirement savings early gives you flexibility to take mini-retirements or career breaks later on, because your nest egg has had time to grow.

Why Downpayment Saving Cannot Wait

Housing affordability has been eroded by population growth and limited supply. According to the Canada Mortgage and Housing Corporation (CMHC), “Housing starts must nearly double to around 430,000 to 480,000 units per year until 2035 to meet projected demand.” That shortage drives both home prices and rents higher. The longer you rent, the more of your income goes to landlords rather than building equity.

FHSA Bridges Retirement and Housing

The FHSA is designed for first-time buyers, allowing an annual contribution limit of $8,000, with a total limit of $40,000. You get the same deduction benefit as an RRSP, tax-free growth, and tax-free withdrawals for a qualifying home. If you never buy, the balance can roll into your RRSP, meaning it also supports retirement. As the Canada Revenue Agency confirms, “You do not need to repay the qualifying withdrawals that you make from your FHSAs.”

RRSP HBP as a Top-Up

If the FHSA is not enough to reach your target, the RRSP Home Buyers’ Plan lets you withdraw up to $60,000 toward a downpayment. The catch is that it must be repaid over time, but for many homebuyers, this is a manageable way to stretch savings. However, your RRSP contributions are capped at 18% of your previous year’s total income.

Renting Too Long Can Be Costly

Rent inflation is not just a headline. Statistics Canada reported shelter prices up 3%year over year in July, a reminder that waiting can mean paying more for similar square footage. Those dollars could have been used to build equity through homeownership instead, which could be leveraged for retirement later.

Multigoal Targeting With a Split Strategy

The truth is, most young Canadians do not need to choose one path permanently. You can create a savings split that adjusts according to your circumstances.

TFSA as the à la Carte Option

The TFSA is flexible enough to be used for either retirement or a down payment on a home. If you save aggressively and then find yourself not buying right away, those funds keep compounding for retirement. If the right home opportunity appears, TFSA withdrawals come out tax-free. Alternatively, you can transfer them to an RRSP to reduce your taxable income in higher-earning years, or take advantage of the HBP withdrawal as long as you have more than 90 days remaining between your contribution and home purchase dates. 

Sample Contribution Splits

A practical way to think about it is to assign percentages to each savings facility:

Entry-Level Income: 50% FHSA, 25% TFSA, 25% RRSP

If you are just starting your career and your income is lower, it makes sense to put most of your savings into the FHSA. This account offers a tax break today, grows tax-free, and can be used later for either a home or retirement. The next portion is invested in a TFSA, which is flexible and can be used for anything in the future without incurring tax. The last portion goes into an RRSP, so you begin building retirement savings early.

Example with $500/month savings:

• FHSA: $250
• TFSA: $125
• RRSP: $125

With Employer RRSP Match: Max FHSA, Contribute Enough to RRSP to Capture the Whole Match, Then TFSA

If your employer offers to match your RRSP contributions, you should take full advantage of that because it is essentially free money. Start by putting as much as you can into the FHSA. Then, add enough into your RRSP to get the entire match from your employer. After that, put the rest of your savings into a TFSA so you keep flexibility.

Example with $500/month savings:

• FHSA: $250 (or more if possible)
• RRSP: $150 (to capture the match)
• TFSA: $100

In a High-Rent City: Tilt 60% FHSA, 20% TFSA, 20% RRSP Until You Buy

If you live in a city where rent takes up a large share of your income, such as Toronto or Vancouver, it is smart to focus more on saving for a downpayment. In this case, direct 60% of your savings into the FHSA. The other 40% can be split between a TFSA for flexibility and an RRSP for long-term retirement growth and reducing your taxable income. Once you purchase a home, you can rebalance and direct more savings into retirement accounts.

Example with $500/month savings:

• FHSA: $300
• TFSA: $100
• RRSP: $100

As TD Bank advises in its financial education content, “Inflation means that the purchasing power of money decreases.” This principle underscores the importance of balancing goals with flexible accounts.

Downpayment Versus Retirement Savings Comparison

Before deciding, it helps to see the trade-offs side by side.

Criteria	Downpayment priority	Retirement priority
Main goal	Buy sooner, reduce rent, start building equity	Maximize compounding, build up savings
Best accounts	FHSA first, HBP second, TFSA for extras	RRSP and FHSA for deductions, TFSA for flexibility
Tax treatment	FHSA deductible and tax-free if used for a home, HBP repayable	RRSP deductible now, taxable later; TFSA always tax-free
Risks	Market shifts, ownership costs, and interest rate shocks	Market volatility, longevity risk
Cashflow impact	Mortgage, taxes, insurance, and maintenance start right away	Contributions can scale with income, with no ownership costs
Contrarian point	Waiting may lock you into years of rising rent	Health or lifestyle may limit retirement dreams later

As the Canadian Real Estate Association (CREA) stressed in its 2021 white paper, “Homeownership is the single largest source of wealth in Canada.” However, the important caveat is the difference between those who bought before the most recent surge in real estate prices and those who are still saving for a down payment today.

Building Your Strategy in Your 20s

Start with the basics: pay down high-interest debt, since no investment will reliably beat a 20% credit card rate. Meanwhile, you automate investments with pre-authorized contributions (PAC) matching your pay cycle. Even small amounts into an FHSA or TFSA create the habit and protect your savings from being spent. Revisit your split each year when your income or rent changes.

Windfalls like bonuses or tax refunds are ideal for topping up your FHSA until you hit your downpayment target. Once you buy, redirect those savings streams into your RRSP to accelerate retirement growth.

Inflation Touches Both Goals

Inflation does more than raise your grocery bills; it raises the amount you’ll need for retirement and makes housing more expensive. As the Financial Consumer Agency of Canada (FCAC) puts it: “Saving early means … your money will have more time to earn a larger amount of compound interest.” With rising costs, giving your savings as much runway as possible can pay off significantly. Highlighting the Bank of Canada’s concern, Reuters recently stated that “Underlying inflationary pressures could persist for an extended period.”

Frequently Asked Questions (FAQ) About Deciding Between Downpayment Savings and Retirement Savings in Your Early 20s

Final Thoughts

Saving for retirement or a downpayment in your 20s is not a black-and-white decision. Compounding over time rewards earlier retirement contributions, but Canada’s limited housing supply pushes affordability and extends the time it takes to save for your down payment. The good news is that Canadian homeownership savings tools are flexible enough to let you do both.

Start with the FHSA to keep both doors open. Capture any RRSP match from your employer. Use the TFSA as your flexible reserve. Adjust the mix as your income, rent, and goals evolve. That way, rising rents do not trap you into the whims of your landlord if they want to sell your rented home, or into underfunded retirement savings later in life.

For a mortgage strategy tailored to your income and homeownership goals, connect with a nesto mortgage expert. They can help you weigh both paths, compare scenarios, and build a plan that secures your future without forcing you to choose one dream over another.

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Why Choose nesto

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Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.

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