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Don’t take debt into retirement

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Here’s David Chilton on using home equity as a substitute for retirement savings:

There are too many risks associated with real estate — even in pricey markets like Vancouver — to justify making it the sole element of a retirement plan, the author and personal finance expert says.

“I don’t like it as a strategy at all because what happens is that anytime you have that kind of exponential rise in real estate it almost always ends up going the other way,” says Chilton. His latest book, The Wealthy Barber Returns, was released in September.

“It may not happen here because there’s so much foreign money coming in. But the potential for a significant pullback is still there.”

House price increases even in super-heated markets are likely to become more muted as the tailwind generated by rock-bottom interest rates eases, he says.

Did I just enter Bizzaro World? Aren’t ‘super heated’ markets often at a greater risk of a pullback?

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rp1
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We entered bizzaro world a long time ago…

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6 years 10 months ago
patriotz
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It would be kind of nice, since Mr. Chilton bills himself as a personal finance "expert", if he talked a bit about fundamentals.

The simple fact is that any asset returns only its earnigs to its owners in aggregate, which means that RE returns only its net rental value, which means that anyone who is expecting to get more is expecting a subsequent owner (i.e. greater fool) to get less.

Or to put it in language that Mr. Chilton might use, a house is simply a place to live. That's worth something – what you don't have to pay to rent a place – but that's all.

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6 years 10 months ago
jesse
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It's more Wonderland than Bizarro world.

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6 years 10 months ago
Annonymous
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You have to think outside the box a bit..there definitely does seem to be something else going on or in fact "Different" about Canada.
http://www.torontosun.com/comment/columnists/lorr…

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6 years 10 months ago
george
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Old Age Security for baby boomers heads toward $100-billion a year

http://www.theglobeandmail.com/news/politics/old-…

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6 years 10 months ago
Alum
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There is always a group of losers who miss the train.

This blog has been up by people with pain.

For long term, there is always real estate gain.

Next year the same story, again again again.

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6 years 10 months ago
registered
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@ 5 George: From the article: "…OAS – a program that pays a monthly pension of up to $527 to virtually all seniors in Canada…" Take the pessimistic maximum value. $110B/(527*12)=15 million pensioners. Really? Our current population is 34 mill. Click on the 'start' button here: http://www.statcan.gc.ca/ads-annonces/91-520-x/py… to see (presumably pre-Harper crippled) Statistic Canada's population age projection as a Flash animation. The boomer peak in 2030 is at 67 years of age and almost completely gone. Below are print screens of the situations in 2020 and 2030: http://img714.imageshack.us/img714/7278/whenflahe… People die. The population, as Harper's minions keep reminding us, is growing rapidly. The nominal value of the dollar drops. An honest assessment would have looked at per/capita cost in fixed year currencies. No wonder these assholes are keeping the details secret. It's in large part just another scare tactic to push… Read more »
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6 years 10 months ago
shriller
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@Alum, true enough.

Most of life is just luck.

There are always winners and losers though and sometimes the train crashes.

I'd be angry if the crash was caused by a drunk engineer or a poorly laid track, wouldn't you?

But delude yourself as necessary.

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6 years 10 months ago
Troll
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Don't take debt into retirement? Bernanke doesn't agree,

http://business.financialpost.com/2011/12/16/bern…

Although, I guess he'll never really 'retire', writing books and giving speeches about how he saved the world.

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6 years 10 months ago
WFT?
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@Alum:

"For long term, there is always real estate gain."

Someone should tell that to the Americans.

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6 years 10 months ago
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IMF warns Canada on housing: http://www.theglobeandmail.com/report-on-business…

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6 years 10 months ago
jesse
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@fixie guy: I don't think people should be under any illusion that the qualification for retirement/pension/old-age benefits is going to be pushed out as life expectancy increases. It's finding the mean point and fixing benefit kick-ins accordingly.

The only other way to ease future liabilities is to grow younger working-age populations quickly to fund benefits. Increased immigration/NPRs can help but it's a drop in the bucket unless it's ramped up significantly. Moving qualification age is unpopular but has the biggest impact.

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6 years 10 months ago
jesse
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@Troll: Bernanke is tenured and likely collecting other DB pensions. Plus the guy, through his role on the FRB, is already suppressing long yields, not to mention house prices in the US look to be near nominal bottom.

Even in "retirement" he'd be crazy not to take current mortgage offerings. Payment-income ratios in the US are near an all-time low.

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6 years 10 months ago
Koonio
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@shriller: one could have bought stocks and took a 40% hit on their portfolio. Can you trust these self centered greedy CEOs who demanded a big raise while the company was filling for bankruptcy?

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6 years 10 months ago
registered
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@12 jesse: The trick is to separate necessity and opportunity. It's a simple truism to say age entitlements will rise over the next couple decades, that in no way proves it's an emergency warranting a restructure of the entire system, unlimited immigration expansion, draconian changes to transfer payments, or any of the other pant-wetting changes the same government with almost a trillion in mortgage guarantees would love to impose on philosophical grounds. That they chose the last one as most important should end any argument about Harper's priorities. Some day we'll figure this out.

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6 years 10 months ago
Annonymous
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So it's ok to take a huge monthy rent payment into retirement?

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6 years 10 months ago
WFT?
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@Annonymous:

In Vancouver, most people's mortgage payments are multiples bigger than market rent for the same dwelling. This is true of most people who bought in the last 6-7 years.

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6 years 10 months ago
Annonymous
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@WFT…Oh well this generation is probably screwed when it comes to "retirement" anyway.

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6 years 10 months ago
jesse
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@fixie guy: "that in no way proves it’s an emergency warranting a restructure of the entire system"

No argument there, there likely wouldn't be an "emergency" even with current demographics and slower immigration. If the public desires taxes to be lowered and not raised, raising the benefits threshold is one of the more effective ways of reducing future deficits.

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6 years 10 months ago
patriotz
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@Koonio:

"one could have bought stocks and took a 40% hit on their portfolio."

If you had put $10,000 into the TSX at its all time high in April 2011, it would be worth $8558 today.

Don't you just hate people who pay attention to facts?

Homework assignment: if you buy a house with 5% down, how much of a price drop does it take for you to lose all your money?

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6 years 10 months ago
patriotz
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@WFT?:

"In Vancouver, most people’s mortgage payments are multiples bigger than market rent for the same dwelling."

Wrong.

"This is true of most people who bought in the last 6-7 years"

Right 🙂

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6 years 10 months ago
Anonymouse
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Does anybody know much about perpetual preferred shares? Garth has been pushing them a lot lately, specifically those of banks, but whenever anybody questions his reasoning he calls them idiots rather than explain clearly why he thinks they're a good buy. Presumably because he wants to sell financial advice later on. There's a little info here, however :

http://en.wikipedia.org/wiki/Preferred_stock#User…

I think it's important when quantifying "opportunity cost of downpayment", if a 5-6% guaranteed return is that easy.

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6 years 10 months ago
WFT?
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@Annonymous:

"Oh well this generation is probably screwed when it comes to “retirement” anyway"

If by "this generation" you mean the boomers, they are mostly laughing all the way to the bank if they sell their inflated real estate.

The children of the boomers are really screwed. They have little prospect for wage gains, stock market gains, or real estate gains (assuming they can get into the market). This applies to those born in North America, of course.

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6 years 10 months ago
Anonymous
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@fixie guy: …scare tactic to push through 2012 agendas important to the ideologues in the Canadian Republican Party….

That along with cattle mutilations and crop circles.

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6 years 10 months ago
patriotz
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@WFT?:

"If by “this generation” you mean the boomers, they are mostly laughing all the way to the bank if they sell their inflated real estate."

To whom, when, and at what price?

"The children of the boomers are really screwed."

Uh huh.

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6 years 10 months ago