How naive I was in writing a month ago that buying a house can wreck your retirement.
I thought the downside of buying a home in an over-priced big city like Toronto or Vancouver was that mortgage payments and other housing-related costs would leave no room for retirement savings. Then I heard from Ernesto Salvi, an investment adviser with Edward Jones in Vancouver who showed me things are worse than I thought.
"This my 15th RRSP season," Mr. Salvi wrote in an e-mail he sent back in February. "I have never seen so many couples under financial stress."
Couples in their 30s through 50s are having trouble contributing anything at all to their registered retirement savings plan, he said recently in an interview over the phone. And then he talked about how buying a house these days won't just put you at risk of having to ignore saving for retirement. You might also find that you're forced to dip into your retirement savings just to get by.
Mr. Salvi has a client who is married with four kids and a house in the suburbs that was purchased a few years ago. Over the previous decade, she had built a small registered retirement savings plan of about $30,000.
In February, Mr. Salvi called this client to remind her about the upcoming RRSP contribution deadline. "She said, 'You know, I cannot put anything into my RRSP and, by the way, I need to cash it in.'"
Mr. Salvi recalls warning her about the withholding tax that applies to money withdrawn from an RRSP. Her reply was that her RRSP was her last resort. "The sad thing is that it took years to grow that RRSP, and it's going to be used up in a few months."
On the surface, it sounds like the house is only part of the problem for this client and her husband. In addition to a large mortgage, they had a heavily used home-equity line of credit, maxed out credit cards and two car loans, Mr. Salvi said.
The house was the killer, though. When you buy a house, you generate wants and needs that weren't there before. Got a house in the suburbs? Suddenly, you're a two-car family. Moving up to a house from an apartment? You'll need furniture, window coverings, carpets, electronics, lawn and yard equipment. Affording it all is easy. Buying a house means you can set up a home-equity line of credit, where you borrow at low interest rates by tapping into the equity in your home. If necessary, credit cards can help you supplement your borrowing.
RRSPs are road kill here. People use them to buy homes through the federal Home Buyers Plan and, as Mr. Salvi's story shows, they may dip into them again just to get by.
In fact, many of Mr. Salvi's clients are struggling to cope with the cost of carrying a house and other debts. He sees homeowners who are typically paying as much as $3,000 or more per month in mortgage payments. Not surprisingly, the clients who made lump-sum contributions to their retirement savings this past RRSP season tended to be on the older side.
"All the big cheques came from people over 60," he said. "It's the crowd between 30 and 50 that didn't contribute. Some of them I've pushed to do it monthly because it's easier on their budget. What I didn't see this year is the extra amount at the end of February."
Ironically, this is the year the federal government has added to the retirement burden of young adults who are just getting into the housing market. Starting in 2029, they'll have to be 67 to collect Old Age Security, which right now pays a maximum of $6,481 per year starting at age 65. You need to save more to cover this loss of benefits, or you can stay in the work force for a few extra years. If you buy a home in cities like Vancouver and Toronto, you might just be making an implicit choice to work longer.
In an upcoming column, we'll look at some real-world guidelines to help you decide if you can afford to buy a home. For now, let's just say you need the cash flow to carry all house-related expenses plus have money left over for a regular savings program.
Mr. Salvi has seen what happens when people buy houses they can't really afford and find that debt rules their lives. "It's a new form of slavery," he said. "That's how I see it personally."