Meet Jim and Margie. They grew up in Oakville and they are in their early twenties. They go out with a great realtor and purchase their first home with a minimum down payment. Their parents have wisely taught them to be intolerant of debt so they start to accelerate their mortgage payments immediately after moving into their home. Both of them have pension plans at work so they leave their retirement in the hands of their employers. They live a great middle class lifestyle and diligently focus on paying off their mortgage faster.
One day, a faithful friend recommends that they meet with a financial planner to set up a retirement plan for themselves. They are relieved about the plan since their retirement was starting to worry them a little. However, because they are so uncomfortable with debt they decide to pay off the mortgage faster so that they can be mortgage free in their late forties. One day in their late forties they pay off their mortgage, become the envy of their friends and pay another visit to their financial planner. At the visit to the planner they realize they have just more than 15 years to contribute to their retirement plans.
For the next 15 years Jim and Margie apply all of their resources to getting their three children through university and bolstering up their retirement plans. Unfortunately, Jim and Margie are forced to retire at the age of 65 when they have reached only 70% of the retirement savings goals. For the next fifteen plus years they live off their savings until they reach their late eighties when they run out of funds and have to look to the equity in their home to provide for themselves in the late years of their retirement. The only way they can have access to the equity in their home is through a mortgage; the very thing they wanted to get rid of in their early years.
This tale plays out too often in Oakville and that is why the fastest growing mortgage sector in Canada is for borrowers over 65 years old. This comes as a surprise, if not a shock, to many, but this typically happens because of two reasons:
- The borrowers did not follow a plan to pay off their mortgage within a pre-determined timeframe.
- They did not save enough and have had to get a reverse mortgage to fund their retirement lives
Both of the above problems can be remedied when we do the following:
- Established a budget and stick to it
- Establish a workable pan to pay off our debts without ruining our financial future.
- Establish a retirement plan early in life to get on the right side of compound interest.
In future articles we are going to explore each of the three points above so we can bring financial peace into our homes. We will provide practical handles for each one.