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Bernie and Linda, 53, Calgary Wanting to retire in a couple of years, these empty nesters have had a long-time goal: to ride off into the sunset with $1-million saved. They're not quite there yet, and he'd like to top up their funds by re-mortgaging their house and investing the money in stocks. She thinks going back into debt is just plain loco. Who's got the most horse sense?
HE SAYS: SADDLE UP FOR THE STOCK MARKET
Linda and I set ourselves a deadline for retirement: April 12, 2013 - that's her 55th birthday. We're both getting fed up with work and can't wait to get out of the rat race. Right now we have about $750,000 saved, mostly in RRSPs. Ideally, I'd like to have a retirement income of $100,000 a year. To get us to the $1-million mark, I'm proposing we take out a $250,000 mortgage on our house and invest it in stocks. I'm a pretty savvy investor - I've been doing it on my own for 14 years, and I've always beat the market, even after a crash. I've taken some courses and done a lot of research, and I'm willing to put in the time. My experience with mutual funds and financial planners is that they're useless - in the '80s and '90s, my returns were never more than 2 per cent, even when the markets doubled or tripled. Yes, everything is risky, but if we want to retire comfortably, we don't have much choice.
SHE SAYS: WHOA, COWBOY
I haven't got the financial chops that Bernie does, so I trust him with most of our money decisions - he's done well on investments, and we've always lived conservatively: paying off all our bills on time, buying our vehicles with cash, and putting money into RESPs to cover our kids' university tuition. But I'm uncomfortable with the idea of re-mortgaging our house. It's a huge debt; we only paid off the mortgage two years ago, and I'd like to enjoy living debt-free for a while. No one can really predict what the markets are going to do. If we invest and we don't get the returns Bernie's expecting, we'll have no choice but to keep working. Not what either of us really wants, but if we have to put off our dreams of travel and golf for a few more years, that's what we'll have to do.
Occupations: He's a software developer, she works in software support.
Kids: Twin daughters, 19, currently in university.
Annual household income: $160,000 ($100,000 from Bernie, $60,000 from Linda).
Assets: House valued at $600,000, $750,000 in RRSPs, two cars (paid in full), no employer-sponsored pension plan.
Bernie's proposed plan: Obtain $250,000 to invest in stocks by re-mortgaging the house at a 3.5 per cent, five-year fixed rate, 25-year amortization period, payments $1,248.18 per month.
THE ADVICE: HANDS OFF THE HOME EQUITY
Financial expert Kelley Keehn says:
Bernie, it sounds like you have two main issues for weighing: one, managing your investments, and two, leveraging your house to invest.
I have no issue with your first statement about managing your own portfolio and the fact that you might do better than the pros.
However, the second issue concerns me a great deal, and I have to agree with Linda that putting your home at risk isn't a prudent idea.
Your plan is to retire in two years and you're about $250,000 short. Borrowing those funds isn't going to get you there on time. You note that "everything" is risky and that you'd like to retire comfortably. You might not be able to do that if your portfolio tanked and you're still on the hook for a major mortgage payment. Sure, the numbers are enticing. But I've heard too many bright, knowledgeable investors share their horror stories (and tears) when it all went wrong.
There are other strategies to a comfortable retirement. Why not consider downscaling your home now that the girls have moved out? Invest your profit in the market and watch it carefully. Perhaps you might consider a home that would allow you to ditch your cars and save big bucks on transportation each year? Or, can you reduce your desired annual retirement income to, say, $80,000?
Even if you could double the leveraged funds in the next few years (which would be more akin to gambling than investing), you'd still fall short of a million dollars (after tax, anyway). I think it's time to call on a certified financial planner to run some realistic numbers for you both and analyze the tax implications and risks before you make any conclusions.
I hear your frustration about your jobs, but perhaps you should seek the advice of a career counsellor or plan to work longer, but on a part-time basis. Whatever you decide, be cautious about a yearning to get out of the rat race while putting your home at risk.
Note: I'd like to thank readers who pointed out an omission in last week's column. If Max bought the car, he'd still need to take transit or pay for parking. But for quality of life, and based on his income, I still vote for the car.
Kelley Keehn is the host of W Network's Burn My Mortgage ( kelleykeehn.com).
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