Retirement and Real Estate

Last modified on October 5th, 2009

There was a tweet tonight that kind of got me thinking. Nowadays, most of us are educated in school that we should start saving for retirement as early as possible to take advantage of the benefits of compound interest. There are lots of books that parable that concept, one of which is The Wealthy Barber, a book I read when I was probably 23 or so.

The question on Twitter had to do with the amount of money a person would need a year to maintain a roughly comparable quality of life. The number floating around was $50,000 a year, one which I think (depending on where you live obviously), would probably be sufficient for most people, assuming they own their own home. There are several rules of thumb to what that absolute number should be, one of which says it should roughly be about 75% of your final year salary prior to entering retirement.

$50,000 a year roughly translates to around $3300 or so of after-tax dollars, or around $110 a day. Obviously if you’re traveling around the world living out of expensive hotels, $110 a day doesn’t go very far. But I think most people would probably be challenged to spend that money on normal every day living (especially if you consider that bar nights and dancing on tables is most likely out at 65 years old).

Unfortunately for me, I’m hitting the retirement savings party a bit late. Given how I had $40k worth of student loans out of school, contributing a pile of money into an RRSP while my loans accumulated interest at a rate of 8% didn’t make a whole lot of sense. That being said, I have still managed to contribute slowly over the last few years into a RRSP account. And now that my loans are basically out of the way, I’m starting to focus on that again.

The good news is that I have a lot of RRSP contribution room sitting around due to my lack of contributions over the years. In fact, I’m pretty sure I have around $100k of unused room which I can take advantage of at any point. Given how my income isn’t as much out in the country as it was in the city, I don’t really have a pile of money to play with every month any more, but I should have enough to make a modest RRSP contribution for this tax year at least.

I’m also starting to think about buying a house out here. Truthfully, I’m just kind of tired of renting and watching all that money disappear every month. Right now I pay $1,100 a month in rent. Even if half of that went to the principle on a loan, that would still be a net increase of around $6,600 a year over what I’m doing now. Right now, I’m playing with a few different options.

Option one is to buy something fairly basic, at least compared to what I’m living in now. Right now I’m living in a $350k – $400k condo, which is definitely outside of my price range. So, no matter what I do, I’m going to have to get used to living in something a bit more basic when I purchase. If I set my sights pretty low, I could probably come up with enough cash to make a modest down payment on a mortgage.

Option two is to buy something a little nicer, in which case coming up with a down payment will be a bit more challenging for me. In fact, in this scenario I’ll probably have to pull my RRSPs out using the Home Buyer’s Plan and use that for a chunk of a down payment. That has obvious pros and cons.

Option three is to do nothing for another year or two. But given how interest rates are so insanely low right now, I’m not sure if that’s the smartest option.

Part of me is enjoying the process of researching all these options. But on the other hand, everyone I talk to has a different opinion on the matter, and it’s hard ultimately deciding what to do. My lease is up in January, so the point in time where I have to make a decision is rapidly approaching.

6 responses to “Retirement and Real Estate”

  1. Lynn C says:

    This is the question, isn’t it? I’m not sure how Canada works with RRSP’s but here we have a limit per year on how much we can contribute. There’s no “catch up” opportunity until you’re over 50.

    I’m late on the bandwagon too, I only just opened a 401K last year. Right now I’m not quite in a position to buy unless I manage to find a zero down loan, but I’m on track to get there in the next year or two.

    Here, you’d be challenged to get a decent condo for anything under $200K, and then you’ve got HOA dues. Something makes me nervous about purchasing anything less than a top of the line condo, too – you can do more to a house to impact its appreciation. If you pick the wrong condo complex, you’re screwed.

    If you think you’ll be able to get out of the house whatever you put into it, or more, then my take is it’s 6 of one, half a dozen of the other. I think the mistake some people make is assuming it will appreciate. If you can find something that just needs some basic cosmetic fixing and you’re able to do that yourself, golden – you should be able to make back some additional money on an increased sale price or at least have some insurance against taking a loss.

    The market is so volatile here that I know many people who are already underwater in their homes, having bought in 2006 or so. You just never know what’s going to happen. It makes me kind of crazy to think about the options, so it will be interesting to see what you decide…

  2. Duane Storey says:

    In Canada you’re allowed to contribute up to 18% of your gross income into a RRSP each year. Thankfully, it also carries forwards into future years, which is how I have a lot of unused contribution room.

    $200k is sort of the minimum here. At that price I’ll probably get a fairly decent 2 bedroom condo at around 1,100 sq. feet or so. At around $250k I can get a really nice 3 bedroom with hardwood floors and a fireplace. I’ll probably be somewhere in the middle

    In Canada we’re allowed to pull up to $25k out of our RRSPs, tax free, for the purpose of buying a house. So I’ll probably be taking advantage of that to come up with a downpayment on a place that’s $250k or less.

    I think real estate is a safe investment as long as you have a long time horizon. If you buy a house thinking it’s going to go up in a year or two, then yah, that’s not very smart. But if you buy a house you can afford today that you actually want to live in, and set the payments such that you’re not going to go broke if interest rates rise, then you’re in good shape.

    We also have CMHC up here – basically a mandatory insurance policy to prevent basically what happened down in the states with the housing crisis. If you can put 20% down or more, you don’t have to pay it. Less than that and there’s a sliding scale based on your downpayment. So in my price range it’ll probably add another $5k or so onto the price, and that just gets tacked onto the mortgage price.

    I’m not even really looking at it like an investment that’s going to go up. I’m just sort of looking at it like an investment that’s going to roughly stay the same, but instead of tossing $1100 out the window every month, I’ll know that about half of it is actually going into real equity. Plus, I think there’s a bit of pride of having your own house and being able to put a hole wherever you want.

    But we’ll see. Lots to think about.

  3. Duane Storey says:

    Also, in terms of a house, I agree it’s probably a better investment. But there’s so much upkeep in a house each year, and I really don’t want to be a slave to it every weekend. I’d much rather put in a few extra hours at work a month to pay for the HOA fee, and have everyone else do the upkeep for me while I watch movies or read a book.

  4. Lynn C says:

    Yeah I agree, I don’t want to do yardwork or worry about septic vs. sewer or any of that crap. No pun intended.

    And yes, we have the ability to pull out of our 401K’s as well but there is a penalty – I’m not sure if the penalty applies automatically or only if you don’t pay the money back within a certain amount of time.

    Anyway…interesting stuff…keep us posted!

  5. Duane Storey says:

    Yah, you have to pay them back in Canada within 14 years otherwise you’re liable for the tax. But, not too difficult I don’t think.

  6. Duncan says:

    Hey Duane,
    I agree that owning vs renting is definately the way to go long term. Right now you can get a variable mortgage at prime plus .10 percent or 2.35%. You can lock in at any time to a fixed rate should rates start to increase. Markets are pretty volitile and conservative RRSP portfolios will likely be lucky to break even over the next few years. Pulling the money out of the RRSP and using it as a downpayment on a home makes the most logical sense. You save on interest and CMHC fees up front for one. This is an instant return that is likely higher than you’d have received keeping it in the RRSP. Second, the money still grows “tax free” as the sale of your primary residence is excempt from any capital gains in Canada. As you’re self employed, I’d definately go with A variable as your minimum monthly obligation is lower plus you can make larger lump sum payments against the principle should you win a large project. Finally, once you have at least 20% equity in your home, you can obtain a secure line of credit at the lowest possible rate. This is security for you as you can always borrow back money you’ve paid against your principle. Not that you’d want to do this, but it’s still nice to have options. The second advantage to home ownership is leverage. Even if you only put 5% down on a property, you get the appreciation on 100% of the homes value. Unless you expect home prices to plummet, this just makes huge financial sense.

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