As we enter 2014, all of us are closer to that point in time that we wish to retire or can no longer work in our desired employment. That is an inevitable fact, and in an ideal world everyone deserves a just (comfy and financially worry free) retirement. But, not everyone will. That is also an inevitable fact.
For many people retirement planning is not getting any easier. Pension plans today and in the future are very likely to be less generous than those enjoyed by previous generations. Greater economic change and volatility is also creating more frequent employment interruptions, which, for many people, cause periods of “stalling” in preparing for retirement. Finally, advances in medical science mean that people are living longer and, while that is clearly good news, it does not come cheaply. A longer life means a longer retirement with all the associated challenges of how to finance the additional years. Moreover, periods of illness are expensive and research shows that good health in old age is not keeping pace with improvements in longevity.
In this rapidly changing context, the value built up in people’s homes over their working lives is becoming more important rather than less important, despite all the glossy advertisements on financial instruments for retirement planning. Most Canadians intuitively know this even if they are not spending much time becoming investment sophisticates. What else is one to make of the fact that half of Canadians generally don’t make yearly contributions to a registered retirement savings plan but close to 70% of households own their homes mortgage free.
Let’s face it; many Canadians that otherwise have employment that pays safely beyond subsistence levels do not save adequately for retirement because of, a) excessive, unnecessary consumption of perishable or depreciating consumer goods and, b) the accumulative effect of taxation at all levels of government in this country. Recent research indicates that income earners in the average Canadian family pay accumulative taxes equivalent to approximately 5.5 months of work per year. Under these pressures, home ownership becomes simultaneously more difficult and yet even more important.
The beauty of home ownership, of course, is that your money grows tax-free. There are no capital gains for your principal residence whereas in other retirement savings instruments there is taxation. Even in your RRSP there are forced withdrawals and it’s fully taxable when taken out on the assumption that in retirement you will be taxed at a lower tax bracket. But, nevertheless, there is a significant tax cost. Given the accumulative burden of taxation, that is certainly no small consideration for retirement planning. Furthermore, how many other areas of life can you invest heavily in sweat equity by fixing your principal residence to raise its value and not have the tax man show-up to take a piece of that “income”?
A second important advantage of home ownership is the forced savings it generates in the modern age of hyper marketing and “the latest and greatest technology” in consumer goods. For many people, loose money in the pocket does not stay there for very long “for fear of burning a hole”. However, a home mortgage forces us to put money away into a life-long, tax-free savings plan in our principal residence. Indeed, while many investment advisors would say that the main problem with locking money into home ownership is loss of liquidity, the fact is that for the vast majority of us the loss of liquidity in a home purchase is a major benefit and not a negative. How many of us do not, from time-to-time, or far more often than that, need assistance with our financial discipline. There is a huge marketing industry out there constantly thinking of ways to get us to be high spending consumers? Bottom line: it is a lot easier to take something out of an investment savings account than it is your home.
Thirdly, one should never underestimate the advantages of having no housing payments (mortgage or rent) during retirement. Most retirees will typically want the security of not having to pay rent or a mortgage. In retirement, we still have to reside somewhere and a lot of people are going to have to increase their monthly expense projections if they have not fully purchased their home. The longer you wait to act, the more difficult that will be. The home, especially when it's paid for, represents security in later years. It's also one of the biggest investments we make with the best defense against inflation that most of us will ever have at our disposal. As such, it represents an asset from which we may obtain needed capital if and when that becomes necessary.
Plan carefully for home ownership and fully understand the benefits of it.
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Thomas Conway, Ph.D., Sales Representative, Conway Fung Homes,Keller Williams Ottawa Realty, President, RFI Group of Development and Environment Consultants 613-878-4418