Real estate week continues here at Financial Uproar, and I can see you’re literally shaking in excitement, since I’m standing right outside your window. Yes, I was there earlier when you did those unspeakable things to yourself. No, I won’t put the video on the internet, providing you read the rest of this post. You’re welcome.
Today’s post is more directed at the older generation, so kids, get your parents right now, which will be easy if you still live in their basement. You might have to show them how to use the mouse, but it’s important they read this, especially if they’re living in a house that’s fully paid for.
Today, unless you’re lucky enough (or unlucky enough, depending on your perspective) to work for the government, your chances of getting one of those defined benefit pension plans are diminishing by the year. Companies just can’t afford to give them out to anybody these days, so I’m not liking your chances to get one in the future.
Retirement saving is hard too. People should be starting when they’re young, but most don’t take the process seriously enough. They go on vacation when they have unused RRSP contribution room. They decide they’ll max out the TFSA next year, since this year they’ll piss away thousands of dollars on clothes, partying, eating crap food and procreating. You can argue all you want about the benefits of having children, but there is no doubt Junior is going to cost you.
After years of this, many people wake up one day, realize they’re 45, and the figurative light bulb goes off. They need to start saving for retirement, or else they’ll be eating cat food and living in their kids’ basement. So they start to save. But since they didn’t start early enough, their efforts will most likely come up short. Even with aggressive saving during your 40s and 50s, accumulating a nest egg big enough for a comfortable retirement is difficult. Government pensions will help, but many baby boomers are looking at a shortfall come retirement time.
Luckily, I’m here with a solution that’s probably been suggested dozens of times before, but WITHOUT ALL CAPS ANGER. Kids, are your parents still around? Or did they fall asleep or maybe went to yell at some teenagers for being on their lawn? Hey, I can understand. I hate teenagers too. But they’re gonna want to listen to this.
Let’s use Calgary prices as an example. If you go back and check out that graph I included in Monday’s post, the average house in Calgary is worth about $400,000. A quick look on Craigslist found all sorts of 2 bedroom condos that rent for $1000 per month in decent parts of the city, so let’s assume that’s what you’d pay if you sold your house in favor of renting.
Any profit from your principle residence is tax free, so you’d get the full $400k from a sale. If you took that full $400k and invested it in a basket of preferred shares/high yielding stocks/bonds that spun off a 7% return each year, you’d make a cool $28,000 per year. You wouldn’t pay much tax on those earnings either, since they’re mostly in the form of dividends.
If you add the approximately $1500 per month you’d max out on for your Canada government pension and old age security payment, you’re looking at making $46,000 per year, which is easily enough to live on, even paying $1000 per month on rent. If you’re married, you can add an additional $18,000 per year when your spouse collects their stipend as well.
Once you factor all that in, a retired couple in Calgary could make $64,000 per year, all without touching their principle, and that’s not factoring in a nickel of cash flow from their retirement savings. Not bad for not planning for retirement. If our imaginary couple lived in Toronto or Vancouver, they could do even better.
If they do stay in their house, their income falls close to 50%, down to $36,000 per year. Renting will cost them $12,000 per year, but they’ll make an additional $28,000 in income. By selling their home, our imaginary retired couple comes out $16,000 ahead each year. Their grandkids are going to CLEAN UP at Christmas.
Naturally, Martin and Hortense aren’t going to want to rent. They’ll be concerned about the hassle of moving (which should only happen once, and they’ll have strapping young grandkids to do the heavy lifting) and the unfounded concern their new landlord will suddenly increase the rent dramatically on them. What landlord wouldn’t want a nice older couple who want to stay for years? Unless rents shoot upwards for some reason, most landlords aren’t going to risk losing good tenants by getting too aggressive increasing their rent.
A word of caution before everybody above 60 reads this post and goes and sells their house. This strategy is particularly enticing in Canada, the land of maple syrup, Alan Thicke and inflated real estate prices. Rents are cheap because home ownership rates have never been higher. A robust real estate market combined with low interest rates has driven our real estate much higher. Many baby boomers are living in a house that’s doubled or tripled in value since they bought it.
Meanwhile, in the United States, we have the exact opposite situation. Many baby boomers have watched in horror as their precious equity went down the toilet. Renting is all the rage too, since most Americans aren’t very good at buying things when they’re low. The exact opposite situation is happening down south, so the plan doesn’t work too well down there.
It’s silly to continue to live in a $400,000 house for free when you don’t have enough money to have the retirement you want. You worked hard to pay off that house, now let it work for you.