Baby Boomers 10 yr real estate retirement plan
Last week, I was asked to comment on BMO’s Retirement Report which pointed out that more Canadian Baby Boomers are using their home as their retirement fund. The BMO study shows the baby boomer generation were not downsizing like many experts were thinking. But instead, they are buying bigger, more expensive homes. The thinking is that the higher priced homes will grow their retirement fund more quickly and more securely.
Several Financial Experts commented on this study…. mostly offering negative reviews about this retirement strategy….. including BMO… you know, eggs in one basket, diversification, that sort of thing… there is merit in the statements but I really don’t agree with the negative spin….. Here’s a link to my quotes about the “10 year plan” in The Star.
The 10 year plan has grown in popularity over the last 5 years as we’ve seen the value of our RRSPs or other investment drop in value. It’s capitalizing on real estate values going up over the long-term. It’s really simple to understand….
THE 10 YEAR RETIREMENT PLAN
Here’s an example of what one couple did….Let’s say you’re between the ages of 35 and 55.
- You own a home worth $500k.
- You have a $300k mortgage., but you can afford to buy a $700k home.
- Your new mortgage is $500k.
- You are committed to keeping that home for 10 years….and you can afford the payments..
- In that 10 years, the goal is to pay down your mortgage by at least half, if not more. (a realistic goal considering the average Canadian pays off their home in 12 to 17 years).
- if your home goes up by 5% each year, on average (and this is probably a realistic number looking back at historical values), then your home should be worth $1.14million.
- the 10 year timeframe is critical… we want to give enough time to live through any up or down real estate market…
Using the example above, in 1o years you should have a mortgage of $350k or less and house worth $1.14millon… that’s $790,000 of equity in your home. Oh, and it’s all Capital Gains Tax Free….
Does it sound too easy or too good to be true? It’s really not… take any 10 year period in history… work out your own stats… This is reality…
By the way, the couple I’m referring to are real… they are actual clients of mine. They bought their home in 2007 for $850k… They have paid down their mortgage to $300k…this is way ahead of schedule…(the low interest rates have helped)…. The value of their home today is approximately $1.5million. They have $1.2million in equity today. They estimate the home will be worth $2million in 5 years… but even if it isn’t, even if the property is only worth $1.2million 5 years from now, I’d say they’ve done pretty well, wouldn’t you agree?
And for those that prefer stocks and bonds, then stick with those investments… There isn’t one good strategy… This plan is less exciting and probably a little boring… but I like boring when it comes to my money and my retirement…
This plan isn’t for everyone. You need to be comfortable with debt and understand real estate…. and you need to commit to owning real estate for 10 yrs (it doesn’t have to be the same house.. you can move)…
If you need help with this plan or just want more info to help understand it, give me a call anytime.
Steve Garganis 416 224 0114 steve@mortgagenow.ca
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