Tim’s 54 and wants to retire in six years. “I’m one of the lucky guys,” he chortled. “Got a government pension.” And he’s right. Just over 70% of Canadians have no pension – corporate, military or civil service – to look forward to, let along one that guarantees 60% of your salary, indexed to inflation.
But Tim, like so many teachers, cops and government workers I’ve met, has PD. That’s Pension Delusion, which leads him to think this big pot of cash eliminates the need to save or invest his money. As a result, he’s got less than a hundred grand in do-nothing, cost-a-lot mutual funds stuck in RSPs for him and Joan. Got a paid-for house, too, worth about $250,000 a half hour south of Winnipeg.
We crunched a few numbers yesterday. Sixty per cent of his $95,000 salary is $57,000 a year, which is $38,000 less than he lives on now. Add in early CPP, and it’s still a $32,000 shortfall. “But I’ll spend less in retirement,” he argued, which is (of course) a myth. People who retire at 60 don’t stay home all day so they can read, knit and get naked. In most cases, spending goes up, not down.
If he cashed-in the taxable RSP funds and used them to supplement his income, that’d last four years. Then what?
Two choices: live small, or sell the house.
The former sucks. The latter rocks.
By adding $250,000 to his portfolio, cashing in the blood-sucking mutual funds and investing in a balanced and diversified portfolio averaging 7% over a number of years (most earned in low-taxed dividends and capital gains), he’d add $24,000 a year to his income. That would easily rent a nice, 2-bedoorm condo in The Peg ($1,100 a month), eliminate overhead (property taxes, maintenance) and boost his income back to 85% of his former salary. Plus, he’d have a $350,000 liquid nest egg, instead of a $250,000 encumbrance. From KD to soufflé.
In a nutshell, this is another reason why real estate has a troubled future. There are 9,000,000 people like Tim and Joan representing 32% of the Canadian population – and three-quarters of them don’t even have guaranteed pensions. The vast majority of personal net worth for this entire generation of wrinkly, confused hedonists is buried in residential real estate. Personal savings have dropped, debt has risen, RRSPs have plopped, HELOCs have sprouted and most people (as evidenced by this pathetic blog’s comments) don’t trust financial markets and weirdly believe everything [email protected] tells them.
So, they either sell now, while markets are still juiced, invest and prepare. Or, try to sell later when a few million others are doing the same, and discover it’s impossible to unload in a falling market except for far less. But that’s what most will do. Like Tim they’ll underestimate living costs, think keeping the house means cheap living, invest what little they have in the wrong places, be surprised at how cheap CPP is, and be shocked their real estate’s turned illiquid.
Guaranteed. This is the world, post-2015. Boomer bust.
Given the certainty of this outcome (along with all the draconian mortgage changes outlined here over past days), buying a house would seem to be pure risk. Especially in hot markets with bidding wars and fat prices. Odds are that 2012 values may not be seen again for many years. In fact, if even a portion of the Boomer horde dumps their real estate in favour of cash flow and liquidity, prices will be far lower for far longer than most people believe possible.
Already a third of folks going into retirement do so carrying mortgage debt. A BMO survey finds 42% of Boomers regret not having saved or invested enough. In the US, where real estate equity’s all but vanished for millions, the lunacy of thinking a house is a retirement plan has been exposed. The average balance in 401(k) retirement plans (like our RRSPs) at one major fund company is a mere $60,000 for this age group.
And while there are endless comments on this blog from young people trashing Boomers for making houses unaffordable and sucking off all the jobs, the outcome could be steeped in the unexpected. According to a prominent US economic prof, this will be the first generation since the 1930s worse off in retirement than their parents.
“According to our projections, it looks like most middle-class workers, not just low-income workers but most middle-class workers, will be living at or near the poverty level in their old age. This is the first time since the Great Depression we are looking at poverty rates increasing among the elderly.”
Is it a coincidence home ownership is now estimated to be 81% among Canadian Boomers, the highest on record?
Nope. Millions have pinned their entire financial lives on a single asset, failing to understand house prices shot higher when they all clamoured to buy, and will do the opposite when they stampede to sell.
Smart people contemplating retirement will get out now. Most will not. That, in turn, will seal the fate of the young and the horny, so blindly covetous of home ownership.
Irony. She’s a bitch.