The Old Rules and New Norms of Personal Finance
No. 1 Old: Finish school, get a job, get married, have children, and buy a house as quickly as possible. Delay saving for retirement until your 50s. New: Recognize that life unfolds differently now. If you have no home or family and spend your way through your 20s, saving for retirement will take longer.
No. 2 Old: Buy the biggest house you can afford. Have a big family and pay off your mortgage – fast. New: Consider whether – and when – home ownership makes financial sense. Think about buying a smaller house or renting until you have a big down-payment.
No. 3 Old: Find a steady job with a good pension and don’t worry about investing for retirement. Stay there for 35 years and retire with a guaranteed monthly income. New: Recognize that you are in the driver’s seat. If you don’t have a job with a secure pension, you have to make sure you plan and save for your retirement.
Alexandra Macqueen is a certified financial planner and co-author of the book Pensionize Your Nest Egg. Like many people in her generation, Ms. Macqueen did many things in the “wrong” order: She bought a sprawling country farmhouse and got divorced before she was out of her 20s and started having kids in her mid-30s. Today, the 44-year-old lives with her daughters, aged 7 and 9, pets and second husband in a small house in Toronto. The Globe's Roma Luciw spoke and e-mailed with Ms. Macqueen about how we should stop trying to follow in our parents’ financial footsteps and carve out our own financial path.
Why do you think there is a need for new ways to think about personal finance?
I’ve noticed a lot of my peers are worrying that they aren’t where they want to be financially. I hear things like: ‘Why am I not as well off as my parents were at this age?’ Or: ‘My parents burned their mortgage at 50 years old. I am never going to be able to do that.’ Many of us will have been shaped by the advice and examples we got from our parents about how to make the financial aspects of our lives work. Except what worked for our parents doesn’t typically work for us. The world has changed.
What was the life script they tended to follow?
People would grow up, get a job, leave the house, get married, buy a house, have kids – in that order and all in a span of five or six years. They were not deciding at 32 to go back to school and get a Masters. So they had more wealth cumulatively by the time they were 35.
How does that compare to the script of those who came of age in the 1970s and beyond?
Today many people are still getting started at 35, in the sense of adult accomplishments like starting a family, buying a house, having children. Combined with the overall increase in the cost of housing, what you get are households with young or young-ish children and large mortgages at the age of 50 and beyond.
What is the biggest impact of that difference?
The 40s now have to do all the work that was previously done in the 20s and early 30s. Our parents bought a house at 25 and it only cost two or three times their salary. Everybody knew that paying off that mortgage was the big goal. And when you did that at 50, your kids were grown and you had 15 years to save seriously for retirement. So deferring saving for retirement was workable.
What are the financial goals or expectations that people should have today?
They need to really examine what makes sense for them. I do think there are a lot of lifestyle expectations that need to be scaled back.
What can a young person starting out do to set themselves up financially?
Early in life can be a great time to sock away cash for the future. What saving early can mean is that you have options later in life. Like buying a house with a big enough down payment that one parent can stay at home with the kids. Or that the cost of daycare on top of your mortgage isn’t crushing. Or not worrying about how to start saving for retirement when you can’t get your head above water financially.
What was the traditional financial logic applied to housing by previous generations?
The buy-the-biggest-house-you-can-afford rule made sense when families had one income-earner, jobs were relatively stable, people were forming families and buying houses in their mid-20s and staying in them for the long haul.
So what has changed?
Number one, people are not having that many kids. And housing affordability has changed dramatically. If you look at average household income and average house prices you can see that in a place like Vancouver, your house might cost 20 times your income. Also, we have these historically low interest rates and affordability is influenced by borrowing costs. So people end up taking on a bigger commitment.
So what should people be doing – or thinking about – instead?
Whether this is really affordable. Run through a number of what-ifs: What if one of the incomes in your household disappeared, due to job loss, illness or disability? What if interest rates rose? What if your home value fell?
Should people be looking at renting?
Well, certainly at renting for much longer. If you saved a lot in your 20s, then you could buy a house with a large down payment. You wouldn’t have this large unpaid mortgage balance to pay down each month. You could also choose to buy a smaller house and make smaller payments.
How has the job and pension situation changed?
When is the last time you heard of a company starting a defined-benefit pension plan? These are not coming back and I am not advocating for that. But you have to wake up and realize that you are responsible for this. There is no going back to: I am going to work in one place for 35 years and then my paycheque is going to convert to a retirement paycheque that will last as long as I live.
Will our generation still be able to retire?
If they haven't saved anything they can – if they can afford to live off of the Canada Pension Plan and Old Age Security. Or they will need to keep working. But disability and illness take people out of the workforce once they hit their 60s. So that plan is not necessarily that robust.
Are retirement expectations today still feasible?
I think so. But the shift that has to happen is that people need to realize that there is no one who is going to prop them up. No company that is going to rescue you. You have to figure this out on your own. And that can be cool and exciting and fun.
This interview has been condensed and edited.