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Season 2 Episode 5: The R word.
How to fast track or catch up to retirement if you haven’t started planning for it yet.
It’s Kenneth Yim, and thanks for tuning in to Boardwalk Talks, the Toronto real estate investing podcast where we walk and talk and go around the board, and play the game of collecting properties. Why? Because we all want to generate enough passive income to fund our life and so that we don’t have to depend on working to earn active income. This show is dedicated to discussing the strategies to help you achieve financial freedom through real estate.
Have you thought about how and when you are going to retire? Statistics Canada says that in 2018, the average age of all retirees is 63.8 years old (1).
And CIBC released a poll last year, where 32% of Canadians between the ages of 45 and 64 have nothing saved for retirement.
53% of Canadians say they don’t actually know if they are saving enough.
And for many people, the amount of money required to fund their lives for approximately 30 years of retirement is a secondary consideration altogether.
Retirement planning is not a one size fits all exercise, and there certainly is not a cookie cutter approach to determining how much money you will need to sustain you throughout your golden years. That’s because the actual dollar amount you need to save will be driven by the lifestyle considerations you choose.
According to the report, the average amount of personal savings Canadians estimate they’ll need to retire comfortably is $756,000. Again, that number may or may not be enough for you, it really depends on you. However, if you’re looking at your bank account and you don’t see nearly 7 figures in there and you don’t think you can ever get there, then don’t worry, there’s still hope. If you think that’s not enough, then it’s all the more reason to start thinking and talking about it.
So, here are a few tips on how you can build your nest egg, courtesy of CIBC:
1. Plan your lifestyle and make the future as predictable as possible
2. Understand your spending today and estimate what it’s likely to be in retirement
3. Work with a financial advisor to project your income and expenses
4. Put your savings plan on auto-pilot with regular deposits to a dedicated savings account
5. Invest for the long term and revisit your investment plan regularly, at least once a year
6. Determine the best time to draw down on public pension benefits or personal savings
So how do you actually do all of this? Well, my plan is to buy more properties. I’m not a huge fan of equities, they are too volatile and I want something more stable. So I look to rental properties for my solution.
You can start with something as simple as buying a condo in downtown Toronto, where vacancy rates are one of the lowest in the world. The rental demand is just that strong. Look at our booming tech scene in Toronto, seemingly overnight it has just exploded. Tech works are paid very well as compared to other industries out there, and as they are newcomers to the country, their initial housing strategy would be to rent, not buy. As they move here and trying to figure themselves out, they want to rent first.
So I was just down at a conference in California last week, and had a staggering realization. The US vacancy rate is 6.18% overall, and the California vacancy rate is 3.49%, according to the last US census in 2017. Let’s compare this to the Canadian Housing and Mortgage Corporation’s numbers. Nationally, it was 3.0% in 2017, and that trend has gone down to 2.4% last year. Toronto’s vacancy rate is one of the lowest in the country, at around 1.0%.
One thing I learned from being at that conference and talking to our American friends is that our Toronto rental market is strong, which props up the housing sector and makes this whole thing work. Toronto is an attractive place to live, and properties are getting more and more expensive (they already are expensive, I should say). Furthermore, the mortgage stress test makes it hard to get approved for a loan, and inflation is getting stronger. I mean, you can see this in the price of every day goods, like a cup of coffee or gas or avocado toast. All the while that the average wages are just stagnating. Our children of the future will have a difficult time saving enough for a down payment, let alone affording the mortgages. Never mind the next generation, our generation now is barely scraping by.
If this sounds all fine and dandy to you but an investment property seems out of reach, here’s some things that you can do to get started. Let’s work off of CIBC’s tips. The first two don’t change, which is:
1. Plan your lifestyle and make the future as predictable as possible, and
2. Understand your spending today and estimate what it’s likely to be in retirement.
You should know those numbers. You need to do these steps regardless. I would then add the following comments the next four points:
3. Work with a financial advisor to project your income and expenses. That financial advisor can be someone like our real estate team, it doesn’t have to be a traditional financial advisor playing in the equities market. Or it can be both.
4. Put your savings plan on auto-pilot with regular deposits to a dedicated savings account. Or, you can buy a preconstruction condo which will force you to save for around 20% of the purchase price over a period of 2-4 years, then you can have the tenants pay off the remaining 80% of the purchase price by paying off your mortgage over the next 25 years. Hard assets should be inflation-proof, because housing costs are included in the basket of goods that the government uses to calculate the Consumer Price Index which is the definition of inflation in the first place.
5. Invest for the long term and revisit your investment plan regularly, at least once a year. If you are one of our clients, give us a call and we can give you an update on your real estate holdings at any time.
6. Determine the best time to draw down on public pension benefits or personal savings. I would argue to never draw down on it. Don’t cut down the tree, keep watering that tree and eat the fruit it bears. If you find that there’s not enough fruit and you have time to wait, then take the seeds and plant some more trees and water that tree and eat the fruit that this tree eventually bears. And then, when you have an orchid, you can pass that down to future generations.
Anyway, the moral of the story is to let your tenants do all the heavy lifting to pay down and pay off your mortgage over the next 25 or 30 years. You are doing social justice to society by providing housing for newcomers, young people, students, lifestyle renters, and anyone that chooses to rent instead of buy. In reward for your patience, you will have a good retirement and your next generation will be taken care of, whether you gift them all or part of your portfolio, or you can use it to teach them math and financial management for looking after assets.
A question that I get from a lot of people is, what If your properties don’t cover? In my opinion, if the negative cashflow isn’t an issue for you, then it’s OK because the tenants are still paying off a large portion of your mortgage. As long as they are paying enough rent to cover property taxes, interest, insurance, maintenance and management fees, then everything else just goes to growing your equity. Think about it, the typical mortgage amortization is either 25 or maybe 30 years. If you do nothing but just buy one property, in 25 or 30 years, you will have caught up to the amount needed to retire according to that CIBC poll, which is only $756,000. I say only, because the average price of a property is a little over $806,000 in Toronto. And that’s in today’s dollars, imagine how much it will amount to in 25 years from now.
That my friends, is how you retire.
Thanks for listening, and catch you next week.
(1) Statistics Canada. Table 14-10-0060-01 Retirement age by class of worker, annual. https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1410006001
(2) BNN Bloomberg. 32% of Canadians are nearing retirement without any savings: Poll: https://www.bnnbloomberg.ca/32-of-canadians-are-nearing-retirement-without-any-savings-poll-1.991680
(3) CIBC Poll on Retirement: http://cibc.mediaroom.com/2018-02-08-Am-I-saving-enough-to-retire-Vast-majority-of-Canadians-just-dont-know-CIBC-poll
(4) Vacancy rates in California and US: https://www.deptofnumbers.com/rent/california/
(5) Vacancy rates in Toronto: https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3410012701
Music: Lights Ahead by Hara Noda
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