It’s tax time again, which means it’s time to question every financial decision you’ve made over the past year, and ask a few more questions like:
Should you focus on saving, or debt repayment?
How do you save when you have kids, with their associated needs and wants?
Do you have enough in your RRSP?
Should you put money into a TFSA?
Have you maximized the government contribution to the RESP?
Why are there so many acronyms to remember?
Although we are in the relatively early stages of our working lives, or perhaps we just left the early stage, Jenn and I have been talking a bit about retirement planning, and this has been on my mind a bit.
To get some more information, I went to a retirement planning session not too long ago.
And a few things struck me.
1) Retirement and Financial planning is full of contradictions.
The person leading the session talked a lot about the importance of investing early, and letting compound interest do the work. This is something you hear quite often.
Yet, at the end of the session, the presenter told us that if you have debt, it’s best to pay off that debt first before putting money into an RRSP.
And yes, that makes sense if you have credit card debt. But this was about mortgage debt. He specifically said, “You wouldn’t borrow money at 3% to invest for an 8% return. If you don’t pay down your mortgage first, that’s what you’re doing.”
So, when are you suppose to save for retirement? When you pay off your mortgage (and other large debts). So the focus should be on paying those off quickly, and then super powering your retirement savings with that money. This of course, flies in the face of the compound interest argument.
Now, for a lot of people, the idea of home ownership is becoming very distant. Depending on where you live, trying to buy a modest house can be well outside of your price range (especially if you have to pay for child care, commuting, etc.)
Mind you, there are other options, like, say, buying in Hamilton instead of Toronto.
I remember being in high school and being told that if you didn’t start investing for your retirement when you were 18, you weren’t going to have enough saved by the time you were 65. 18 years old! At that point, most people are still devoting their income to school (and drinking and partying and clothes and other stuff), but the point is, what little income they do have is gone on “essentials” of being 18 years old. What extra money do they expect people to save?
And this brings me to my second realization, or at least second thought.
2) I sometimes think a large focus of the retirement saving/push for real estate is just another way for the baby boomers to make it all about them.
Since they came on the scene, the boomers have been the biggest market force, with companies making products for them. And this continues. Think about those Grey Power insurance commercials. Being an older driver isn’t characterized as being a blue-haired menace anymore; it’s about being a safe, moderating presence on the road. It’s all those other people who cause problems.
The big baby boomer retirement bubble is coming, or so we’ve been told for a few years. The boomers are getting to that age, and they will soon be getting out of the workforce and living off their RRSPs.
(Except of course, the baby boomers aren’t retiring completely, but rather going back to work, which may be keeping younger people from entering the workforce, but that’s another topic)
Now, many baby boomers probably got hit when the recession dropped the value of their portfolios, but the indexes have all recovered. And despite the roller coaster nature of the markets over the last few years, everyone is still encouraged to buy into mutual funds and stocks, especially the young people.
And it makes me wonder if part of the reason we’re told to buy mutual funds is because the baby boomers need their portfolios to grow, and to do that, they need more people to buy, and those people would happen to be their children.
It’s similar for real estate. Real estate is a sure-fire investment, people say. Rising house prices are good; it means you are have higher net worth, and if your house goes up in value, it gives you more options to sell and buy the house you want — except it doesn’t.
Rising house prices are good if you are planning on selling and then buying something smaller, like many baby boomers are.
But for people who are still in the market, it’s not so good.
Otherwise, it can kind of hurt you. Think increased cost to enter the market, increased property valuation and property taxes, and the fact that, no matter how much your house is worth, or gone up in value, you can’t eat it.
So, lets say you bought a starter home. Since then, your family has increased in size. Well, time to buy a larger house. And great, your house increased in value so you have more buying power.
First, you have to be able to find someone to buy your starter home at the increased price. But the larger problem is that if the value of your house increased, you can assume the value of the houses in your area or city increased just as much, so you don’t have any increased buying power.
And you’re left in the same position you were before. (I know this is based on the assumption your actual earning didn’t increase, but remember, in this scenario your family grew, so you have other costs to worry about). You can get a bigger house, but probably not in the city or area you are in.
There are other benefits to home ownership, and I don’t regret purchasing where and when we did, but I don’t buy into this idea that the ultimate goal and the ultimate investment is in real estate. Sure, they aren’t making more land, but with our aging population, they aren’t necessarily making more buyers either.
So, do I seriously believe this? No, not entirely. We’re still making our retirement plans, but we are also making sure we have enough to live our lives and be happy with our children in the here and now. If stats are to be believed, Jenn and I should have a long life expectancy after retirement, and that concerns me, because we want to make sure we have enough money to support that. But maybe I’ll take a page from the boomers and just rely on the younger generations to support us when they buy our house at a hugely inflated house.