Tuesday, June 23, 2009

Long term planning

Post by Reid:

Let’s look at the long term financial security of two families both aged age 30 that live in Victoria, earn $100k per year and wish to buy a $500k house. The Optimistic family has $25,000 in their RRSP’s and plan to withdraw this to buy that home and finance the rest over 35 years. They have been told this is a sound financial decision as interest costs and property taxes are less than the rent they are currently paying. They will have to pay back the $25,000 over the next 15 years into their RRSP, so they are told they are not robbing their retirement. This family would like to put money into their RRSP, but each year they simply have nothing left to invest given the high cost of living. This family manages to make all their mortgage payments and in 35 years they are mortgage free just as they retire.

The Balanced family is in the exact same situation, but has done a lot of research on financial planning and has decided they will save their $25,000 deposit while leaving their RRSP account alone. They save hard over the next year and learn how to live below their means. With this new found skill they decide they will pay off their house over the traditional 25 year period while maximizing their 18% RRSP contributions each and every year. Once their mortgage is paid off the Balanced family plans to invest their mortgage payment into the TSFA until they retire at age 65.

These families go about their lives and meet all their payments under the following economic circumstances for both:
  • Inflation stays low at 1% allowing five year mortgages to stay a 4.25% throughout the next 35 years
  • Their houses manage to appreciate at an average rate of 3% per year, a full 2% more than inflation
  • RRSP and TSFA investment return on average 6.5% per annum
As these families retire, they are both feeling good about their house purchase decision. The Optimistic family never used their house as an ATM machine and managed to get it paid off before they retired unlike many of their friends who took a mortgage into retirement. The Balanced family made a lot of sacrifices over the year, but they feel really good about their retirement.

The chart below shows how the net worth of these two families increased over the 35 year period. Net worth is defines as the value of their house less outstanding mortgage plus the value of their RRSP and TSFA’s.


At the end of 35 years, both families own houses outright that are worth $1.4 million making their investments in those homes 35 years earlier look pretty good. But the big difference is that the Balanced family has investments worth over $3 million and the Optimistic family only has about $150,000 saved in their RRSP’s. The only way the Optimistic family can finance their retirement is to sell their house or take out a reverse mortgage.

You may say that this example is extreme, but if you research how much average families actually invest in their RRSP’s, the Optimistic family is like many typical Canadian families and most will have to sell their homes to support retirement. A key message here is that you have to save a lot more money for retirement than one thinks and it needs to far exceed the value of your home. Although three million dollars may seem like a lot of money it is actually about what a 30 year family will need in 35 years to properly support themselves under the above economic assumptions.

Proper financial planning will not stop you from buying an overpriced house, but only make you realize that you must factor in proper retirement and other financial matters into the overall buying decision. For most it takes many decades to generate real wealth, but it can be achieved.

34 comments:

Gareth said...

Normally I agree with much of what you publish but in this scenario you ignore a major issue.

How much is 35 years of actually being able to go out and enjoy life worth? Sure you can save an extra few million by living like a hermit for 35 years but at what cost?

How many people do we all know who saved every penny for retirement only to then be too ill or sick to actually enjoy their money?

Prairieboy said...

You took the words out my mouth Gareth. Optimistic couple enjoys life, goes on family vacations, has a few toys, etc. Balanced couple eats Kraft Dinner for 25 years, buys shoes second hand for their kids, they retire rich and miserable. What if both couples die when they are 55 years old - who enjoyed life more?

Prairieboy said...

Balanced couple could not buy that house with a 25 year amortization because you are allowed 32% of your gross to go towards mortgage, taxes, and heat. They are allowed $2667 / month. A $475000 mortgage with 25 years @ 4.25 = $2563 / month. Add taxes and heat - they can't do it. $475000 for 35 years @ 4.25 = $2164 / month - the optimistic couple just scrapes by.

HouseHuntVictoria said...

Here's another spin: why stay in Victoria at all and spend that kind of money?

Seems to me it makes considerably more sense to move to a town that provides the benefits balanced couple will enjoy later in life with the ability to enjoy life today as well.

Surely the weather and oceanside can't possibly be worth poverty in retirement or kraft dinner during the best earning years?

Prairieboy said...

Exactly HHV! Having not grown up near the ocean, I don't have the intense longing to be near it, as many islanders do. However, when family and friends are here, I guess you make the necessary sacrifices to live here. Similar scenario, is it worth moving somewhere more affordable if it means leaving behind family and friends?

Roger said...

I think some of the posters here don't get it. Many in their twenties or thirties don't realize how fast time goes by and what happens if you don't save for your retirement. The chances that both you and your spouse won't be around past 65 is pretty slim. Trying to survive on CPP and OAS is pretty grim.

Reid's calculations are not about being rich. They are what you need to do if you want to live on 50% of your pre-retirement income.

We haven't even touched on what is required for your kids post secondary education. Even today that can run into tens of thousands of dollars unless you want to see them saddled with incredible student loan debt.

And to answer Prairieboys question" "Similar scenario, is it worth moving somewhere more affordable if it means leaving behind family and friends?"..

My vote is YES. I left the prairies after graduating from University and lived in several cities before coming to Victoria. It is not difficult to make new friends and with all the communications we have today it is easy to keep up family relationships. Life is also more interesting when you move out of your comfort zone.

Victoria has the second most expensive housing in the country. As HHV said you have an option that allows you to save and own a house. MOVE somewhere else and secure a future for you and your family.

Roger said...

Prairieboy said:

A $475000 mortgage with 25 years @ 4.25 = $2563 / month. Add taxes and heat - they can't do it. $475000 for 35 years @ 4.25 = $2164 / month - the optimistic couple just scrapes by.

Their mortgage is not 4.25% for 35 years. In the previous thread I showed what happens to todays buyer buying at the TDS/GDS limits. They are in trouble in five years when they renew. We presently have record low interest rates and they are going to go way up when the recession is over.

Most of today's stretched buyers are not making a 35 year plan they are just using short term thinking and hoping for the best. They are relying on the "real estate always goes up myth" and not realizing what happens when rates go back to typical levels and the bubble bursts.

Roger said...

Gareth said:

How many people do we all know who saved every penny for retirement only to then be too ill or sick to actually enjoy their money?

I am over 55 and know lots of people who are retired or nearing retirement. Very few of them are too ill or sick to enjoy retirement. The vast majority are concerned about how to enjoy their retirement years and make their savings last. Some can't retire because they didn't save and have to continue working whether they like it or not. Some have been downsized and are now working in service industry jobs in order to get by.

HouseHuntVictoria said...

The amount of time I spend with family and friends dwindles as I age, but the quality of that time has increased. I would gladly trade the ability to see friends and family on a whim for a two week planned vacation home each year with plenty of disposable income to enjoy the sights and activities in town.

I know a few long time Victorian couples who have left town in the past few years, none of them regret the decision at all. In fact, most of them have come to the conclusion that the cost was never worth it.

Roger said...

I think it is much easier to see what is necessary for retirement planning with some examples.

A family making 100K per year of pre-tax income plans to live on 50K (adjusted for inflation) starting at age 65. They expect to get maximum CPP and OAS. Inflation is assumed to be 2.5%. They hope to get 8% annual return on their TFSA or RRSP savings.

Here is what they need to do if starting at age 30 Calculation - click here. They need to save 7.5% of pre-tax income for 35 years.

Here is what they need to do if starting at age 40 Calculation - click here. They need to save 14% of pre-tax income for 25 years.

If you want to use the Retirement Planner tool it is available online here. The View Report Button provides further details and a breakdown for each year of investment and withdrawal.

Roger said...

In today's Times Colonist"

Mortgage arrears soar in B.C..

The number of B.C. and Yukon residential mortgages in arrears has nearly doubled year-over-year ending in March, and numbers are predicted to keep on climbing in the wake of global economic woes.

The court ordered sale list that I subscribe to has 56 listings North Of The Malahat. Unfortunately it does not cover Victoria.

Muriel said...

Mortgage arrears rising
The number of B.C. and Yukon residential mortgages in arrears has nearly doubled year-over-year ending in March, and numbers are predicted to keep on climbing in the wake of global economic woes.

"It will continue to go higher in coming months. We're not through the recession, so we'll see further rises in arrears and defaults," said Helmut Pastrick, chief economist for Central 1 Credit Union.

Rest of TC story here

Also, Roger, re: the retirement calculations you posted above -

If it's a couple we're talking about, shouldn't the calculation figure in two CPP and two OAS payments?

So instead of $908 for CPP, it would be $1,816, and instead of $516, it would be $1,032. If so, that would make a pretty major difference to the amount that needs to be saved. Both of these amounts will also rise with inflation, at least to a limited degree, and at least for now.

Also, I know many people do not have employer pension plans, but in a town where govt is a major employer, quite a few do. The provincial govt pension plan, as well as the one for college employees, is a defined benefit plan. Factoring in any money from employer pension plans would also make a significant difference to the amount that needs to be saved in order to have a comfortable retirement.

Of course, anyone still trying to pay off a ridiculous mortgage past 65 is going to be affected in a different way.

Roger said...

Muriel said:

If it's a couple we're talking about, shouldn't the calculation figure in two CPP and two OAS payments?

So instead of $908 for CPP, it would be $1,816, and instead of $516, it would be $1,032. If so, that would make a pretty major difference to the amount that needs to be saved. Both of these amounts will also rise with inflation, at least to a limited degree, and at least for now.


Yes in the case of a couple there would be two CPP payments and two OAS payments. However both CPP payments would not be at the maximums because both would have not contributed the maximum payments for 35 years. Lower earning and non working years significantly affect the calculations. The maximum CPP is $908 but the government says the average paid is $502. The maximum OAS is $516 provided you meet minimum OAS requirements.

In regards to inflation. All figures in the calculator are adjusted for inflation. The CPP, OAS and desired income are all adjusted and you can see the results in View Report.

Muriel your last point was about employer pension plans. Only about a third of Canadians have an employer pension plan and many of these are defined contribution plans which are not nearly as beneficial as defined benefit plans. It is also dangerous to plan on receiving employer pension benefits . Career plans change and if you leave the public sector your contributions will probably get rolled into an RRSP. That is what happened to me. I was a federal civil servant for 11 years after graduation and left because I found the career was a dead end and too stifling.

HouseHuntVictoria said...

Regarding pensions: yes, if you have a DB plan, your retirement planning is basically taken care of for you. The nature of work has changed though. Many gov't employees aren't career gov't employees, especially if they are skilled.

Locals who have DB plans: nurses, teachers, municipal employees, prov and fed employees, big 5 banks, tenured university and college employees.

I don't believe that Victoria bucks the national trend of roughly 20% participation in a DB plan. Even if it did, the number of employee shifts, without pension portability, is on the rise. Simply put: even if you have a DB plan now, there's a strong chance you won't when you retire.

While owning a home is an important part of a financial plan, it is far from the most important part of a financial plan. I'd put 4-6 months emergency cash as paramount, retirement planning 2nd, income protection 3rd, home ownership after.

patriotz said...

While owning a home is an important part of a financial plan, it is far from the most important part of a financial plan.
...

Quite the contrary, the decision to buy (or not buy) a home is the most important part of a financial plan. It's by far the biggest investment you'll ever make (and yes buying a house is an investment whether you live in it or rent it out).

Buying a house at a price that doesn't make sense (like right now) will sink your financial future just as surely as putting your whole RRSP into Nortel in 2000.

Roger said...
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Roger said...
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Roger said...

Some earlier reader comments said that saving for retirement might mean having a reduced lifestyle now. That is true but if you are a member of a defined benefit pension plan that decision is being made for you.

Consider the BC Gov't pension plan. The employer and employee both make mandatory contributions. The employee contributions are hefty...

As of April 1, 2009, the rates are as follows:
Employee contribution rates are:
• 7.78% of pensionable salary up to the YMPE, and
• 9.28% of pensionable salary in excess of the YMPE.

For 2009 the Year’s Maximum Pensionable Earnings (YMPE) is $46,300


So a household consisting of two gov't employees making 50K each would be contributing $7891 towards their retirement and each would receive a blended CPP/BC Gov't pension.

The household with neither in a defined benefit plan would be contributing the CPP maximum ($2318 each) or $4237 provided they were not self employed. Self employed workers pay double these amounts.

The difference in pension contributions between the two households is $3654 or 3.654% of total income. What would happen if this % difference in income was saved every year?

Assumptions:
- Age of both individuals 30
- Household income of 100K (50K each)
- Salary increases 3% per year
- Age 90 life expectancy of surviving spouse
- inflation at 2.5%
- Investment growth @8% before retirement and 6% after.
- Both receive maximum OAS
- Both receive maximum CPP

This plan would yield 47% of pre-retirement income. Calculations here. Not nearly as high as the defined benefit plan of around 70% but adequate to live on. Saving nothing would leave only government OAS and CPP income of 29% of pre-retirement income.

victorianna said...

Wow. Wouldn't it be nice if life had a great trajectory like that, that didn't include any periods of unemployment or illness that ate through savings, any need to use savings to start businesses, any time out to raise children and live on one income for a few years, etc. You might just have enough left to put your 1.75 children through college, too. I bet that fewer than 5 percent of people could pull that scenario off. I have to say that the switch in emphasis on the blog away from real estate to financial planning is depressing me. (Full disclosure, I am married to a financial planner. He's not as depressing as you guys are because he deals in the real world, where people have problems and lives. He also focuses on helping each person make an individual plan, realizing that silly idealistic scenarios like the one laid out in this post work just like that, in that ideal world where real people don't get to go.)

In our case we have had most of the above, not illness, thank God, but a bout of unemployment, one-income and using savings (and going into debt) to start a business. We also chose to adopt a special needs child, bringing our total to four. In our case, we sold our house to get out of the business debt, and have watched prices go up ever since. We have rebuilt our savings significantly, but buying a house in an overheated market is not in our financial plan, especially not at our ages (about 50).

So, I'm not getting much out of the "if you start at age 30, have two or fewer kids, never take a vacation or eat in a restaurant, and buy a house priced at double what it should be for affordability, then you'll retire a millionaire" discussion.

My plan? Keep saving, never buy in Victoria while it's crazy, and move away from here as soon as we can, which in our case is retirement, since our business is tied down locally. Also, stop reading bloody depressing, unrealistic blogs.

HouseHuntVictoria said...

Victorianna,

the content of this blog was getting stale. we were rehashing the same tired discussion of why victoria real estate buying is ridiculous at these prices.

several readers wanted to know more about financial literacy. back when i first started this blog it went through a steep learning curve of what was interesting and what wasn't. not everyone can be pleased.

i'd like to invite you to add your thoughts more specifically regarding the breaks in earning and savings time and the implications that has on your family's ability to plan and save. we can all learn from one another.

Roger said...

Victorianna,

Yes the tone of this blog has changed. Many of us have been on here posting since this blog started a little over two years ago. Many topics including real estate stats; MSM, VREB and realtor bias; affordability, buyer madness and RE market predictions have been discussed at length and in my opinion were getting a bit old. In particular the drivel from drive-by, anonymous posters resulted in HHV requiring logins in order to keep the conversation courteous. I appreciate the shift in focus from strictly dealing with the real estate market to considering the broader financial implications of buying, owning and investing in real estate.

Many of your comments about financial planning were right on the mark. Sure unemployment, illness and life in general have a drastic effect on what happens to one's financial future. My examples were only trying to illustrate how various tools could be used to do some financial planning and were not meant to try and portray real life. You are fortunate enough to have ready access to a financial planner and have years of financial experience of your own. Many of the readers here do not have a financial planning background or the skills necessary to make financial plans, especially as it pertains to real estate.

Some of us on this blog are trying to provide a forum for the exchange of constructive ideas and information about the financial implications of home ownership. I have tried to provide some "what if" tools to help people objectively make some financial decisions. Some may try to use the tools on their own while others may decide to use the services of a professional financial planner or adviser.

As far as financial planners go there are many that bill themselves as such and they are nothing more than mutual find salesmen or stock brokers that make their income off commissions. This is hardly unbiased advice. The best financial planning advice comes from fee only advisers that do not sell securities or receive commissions or trailer fees for the products they recommend.

I hope you continue to post on the subjects that interest you. If you don't like the topic at hand then write a guest post and ask HHV to post it. I am sure he would be happy to get some new ideas.

Roger said...

Late breaking news...

Pamela Anderson to fastrack her $50-million B.C. property plans..

Pamela Anderson is fast-tracking her $50-million waterfront development in Ladysmith, saying it's time to strike with the economy in recovery and the province attracting a global audience for the 2010 Olympic Games.

"She was quite adament that we have to take advantage of the Olympics, with so many people from all over the world coming here or watching it on TV," Courtnall said yesterday.

Laughlin said most of the units will be priced in the $400,000 range with a maximum of $700,000 for the waterfront.


I imagine many Olympic visitors will pop over to Ladysmith to check out the condos.

NanHousing said...

I am sure the thousands of people flocking over on seaplanes and ferries will completely ignore Mill Bay, Victoria and Nanaimo as places to buy property.

Oh yeah...the 2010 Olympic downhill skiing will be held in Ladysmith on a silicone surface due to minimal snow accumulation.

NanHousing said...

...and they will take place on the twin peaks...

victorianna said...

OK, sorry for the angry tone of my last post. I truly appreciate everything I have learned and shared on this and other blogs, and I truly didn't mean to/shouldn't have made a personal attack on the poster who created the scenarios, because I do understand that he was just trying to show the implications of a difference in saving/mortgage paydown methods/patterns.

I guess I would just like people to remember that life happens and the best-laid-plans do not materialize for many people. They need hope, and I fear that posts like this one may make people who haven't had the ideal life feel, "Oh well, that's it then. Too late for me." And I really think that it is rarely too late. I also truly believe that coming back from financial adversity is an important skill, perhaps more important, even, than the "you can't afford to put a foot wrong" approach I hear from many. Because everybody occasionally puts a foot wrong.

Regarding financial planners, again, full disclosure, my husband is indeed a financial advisor with a major Canadian bank-owned dealer, and he is indeed paid on commission. I'm sorry, but you are wrong, Roger. The value of the advisor is in the value of the advisor. You can't generalize based on how they are paid. I know a lot of fee-paid guys who give crap advice.

My husband happens to be a bond expert with more than ten years experience in bank treasury departments before he became a broker. He is conservative, informs his clients about *all* their fees, upfront, rear-end, commission, trailers on mutual funds, MERs, everything. He always puts the clients' interests first, and yes, we make less money because of his ethics. And I'm glad, because we both sleep well at night. Just because he is paid by commission doesn't make him unethical.

I don't deny the system is riddled with problems. My advice is, interview, interview, interview. Find an advisor who explains everything to you, makes sure you understand all the options, all the hidden costs, and can answer every question about every penny. Ask the advisor if he/she is rewarded for selling certain funds, if they are encouraged to sell certain lines of products, how their clients' portfolios are weighted, and why. Ask them how they respond to pressures to sell certain products. Ask to see sample portfolios, and ask them to show how and why they have included the products they have. Demand full disclosure regarding their recommendations, that is, what the advisor/broker gets out of it, and if you don't get it, move on to the next candidate.

HouseHuntVictoria said...

victorianna, don't worry, we'll still have our regularly scheduled programming of tongue in cheek commentary on the MSM and the real estate industry too.

Roger said...

Victorianna said:
I'm sorry, but you are wrong, Roger. The value of the advisor is in the value of the advisor. You can't generalize based on how they are paid. I know a lot of fee-paid guys who give crap advice.

I said:
As far as financial planners go there are many that bill themselves as such and they are nothing more than mutual find salesmen or stock brokers that make their income off commissions. This is hardly unbiased advice. The best financial planning advice comes from fee only advisers that do not sell securities or receive commissions or trailer fees for the products they recommend.

I stand by what I said. Whenever someone gives advice and makes a commission on a securities sale and/or receives a trailer fee the advice will have some degree of bias. If the client does not remain fully invested in mutual finds (trailer fees) or does not trade periodically there is no income for the adviser. As you correctly noted there is often pressure on advisers to push certain products or services of the organization. I never said the adviser was unethical, just biased. The client may still be treated fairly and receive full disclosure on all products and fees.

Also there is more to financial planning than recommending and updating an appropriate securities portfolio. Estate planning, life insurance, income tax, business and retirement planning are also important. Investment representatives (brokers) and mutual fund salesmen can only provide limited advice in these areas.

You gave on an extensive list of good questions to ask when selecting an adviser. If I use a fee based adviser, that does not sell securities, I only need to ask half the questions in your list.

Readers interested in what a fee based adviser might offer can take a look at this site.

Disclosure - I am not a client or affiliated with this firm in any manner.

victorianna said...

Many fee-based advisers have no training in securities and investing. Many commission advisers do have training in estate planning, income tax, life insurance (many commission salespeople also have life licensing), and retirement planning. I also stand by what I said. Commission pay doesn't equal bias and greed.

Here's an analogy. We happen to educate our children at home. I happen to believe that the school system is a mess, and that most teachers are, yes, biased in favor of a corrupt system that does not operate in the best interests of children and families. Does that mean that all teachers are biased? Does that mean that some teachers don't act in the best interests of children and fight this corrupt system? No way! There are many great teachers out there fighting to make the system better.

There are also many commission-based advisers out there who don't allow trailers and commissions to affect their decisions and recommendations. If my husband worried about trailers, he'd have a much higher percentage of funds on his book than he has. In fact, he has one of the lowest percentages of funds in the industry, because he will only sell funds *when it is in the client's best interest*! Yes there are people out there that do that.

For you to insist that all commission-paid financial advisers make biased recommendations because their bias will only allow them to make recommendations that allow them to profit financially is illogical, insulting, downright false and, in my opinion, libelous.

Not every decision is made for financial gain. Does every salesperson try to sell people up for a greater commission, because they will make more money? Many do, but to say that all do is, again, generalizing and biased.

I'm sorry but if this is what you call financial literacy, attacking an entire profession based on how they are paid, and refusing to acknowledge that many people act in the best interests of their clients and not for their own financial gain, then I'm done here. Sorry, but you've demonstrated your own bias, and there's no point continuing this.

HouseHuntVictoria said...

Victorianna,

Your husband is clearly cut from a different jib than a lot of commission based advisors out there. I don't think Roger was making the claim that all commission based advisors are biased.

If I see a bank FA, they are often limited to only advising on the products they sell, which tend to be proprietary products. Sure they can refer me on to someone who has more products to sell or set me up with a self directed trading account, but they are coached to, and partly compensated for, their ability to close me on products the banks want me to buy.

"Why would you want bond A when I can sell you GIC B that provides the same return and guarantee etc?"

The same basic issues exist within the 2nd tier FA industry (CFPs, Insurance FAs/Financial security advisors etc). If they work under a brokerage, like F55 or Investors Group, they have a limited product portfolio to sell to me and their compensation is often skewed towards selling in-house products versus their co-marketing agreements with other financial product companies.

The so-called broker financial planners who claim to be unencumbered from corporate direction do not necessarily have open access to every product on the market. Nor should they have. There are many thousands of MF available in Canada, how can we expect anyone to be familiar and knowledgeable about them all?

Fee for service financial planners who do not sell financial products are generally considered unbiased because they don't sell anything for compensation. Yes, this fact doesn't necessarily mean they provide good advice. But it does mean that they likely provide unbiased advice.

For the record, I do my financial "planning" myself, buy my products either in a big5 bank branch or online using a big5 self-directed trading account. Many of the products I own have trailer commissions that get paid to the bank or the advisor and I am completely fine with that. I'm aware of these commissions because the advisors I've seen have disclosed them to me.

Most people will never pay a fee-for-service financial planner because they believe they get good advice from an advisor who gets paid via sales commissions. Ultimately, it's the consumer who makes the choice and judges the level of bias, ethics and service they receive. It sounds like the people who see your husband are in good hands.

Reid said...

I have been on the road since my post and unable to respond, but interesting discussion. It aligns closely with my experience in life. I find it fascinating that so many people I meet can talk about real estate all day long:
• How much money they have made on their house
• What the house up the street is listed for and how it compares to their house
• Their up coming renovations
• The great mortgage rate they just entered into
• The next neighborhood that they plan to buy into
• How corrupt and greedy realtor estate agents are
• etc

But as soon as you change the topic to retirement planning, no one wants to talk about it and where they stand. Many get angry and defensive; especially people in the 40’s and up who I assume are behind the eight ball. But the retirement plan is so much more important than the house (unless of course you have a defined benefit plan and intend on working your entire life for that employer). A house can be seen, but a retirement plan is hidden. It is any wonder that the latter is a disaster for most.

My post was simplistic, but most financial planners that I have know start with a similar approach to educate their new clients on the time value of money, compounding, tax free earnings and retirement planning. A personalized plan is critical because everyone’s circumstances and goals are different. Rest assured my life has been far from simplistic. My kids and I have been dealt a few severe blows that thankfully most will never have to deal with. As hard as these events/crisis have been, they have made me a stronger and more dedicated person/father. Yes these events have cost me a lot of money and lost opportunity, but they were never reasons to venture away from my long term overriding financial plan and balanced approach to life. They just sidetracked things for a while.

In my post I mentioned that the Optimistic family never used their house as an ATM machine. My experience suggests that this would actually be rare, because almost everyone does borrow against their house. More than half the people I know that bought a house 10+ years ago (for a fraction of today’s prices) owe more today on that house than they paid for it. Many of these people will take a mortgage into retirement because they are unable to live below their means. And no surprise most of these same people have neglected their retirement planning.

As far as real estate agents go, there have been many posts here slamming them and their greed, but there are really good agents who will put their client’s interest first, but in general my experience is that most are driven by the commission cheque and greed. As far as financial planners go, I agree with Roger that in general the financial planning process does not go far enough because financial planners are generally focused on investing and investments, yet proper financial planning goes far beyond that which is what I referred to as the holistic approach to financial planning. Yes there are many really good financial planners that put their client’s interests first, but in general those paid by commission will sell the products that generate their income.

The main purpose of my post was to demonstrate the importance of long term retirement planning and how a decision today to buying an expensive house with cheap money can have on your retirement.

Roger said...

Victorianna,

I am a little surprised by your recent change in attitude on this blog. In the past you have made many great posts about your reluctance to buy overpriced real estate in Victoria. I think readers have learned a lot from your comments.

However, In this thread you started off by saying that "the switch in emphasis on the blog away from real estate to financial planning is depressing me.". Then you ridiculed my posts and Reid's with comments like:
- "silly idealistic scenarios like the one laid out in this post"
- "He's not as depressing as you guys are because he deals in the real world, where people have problems and lives."
- "Also, stop reading bloody depressing, unrealistic blogs."


My response to your pejorative remarks was courteous and I acknowledged that "many of your comments about financial planning were right on the mark".

In your last post you have twisted my words and continued your negative personal comments about me. Never once did I say that your husband or all commissioned based financial advisers were greedy or unethical. In the contrary I said "The client may still be treated fairly and receive full disclosure on all products and fees."

I have never stated or implied "that all commission-paid financial advisers make biased recommendations because their bias will only allow them to make recommendations that allow them to profit". What I did say was that whenever someone gives advice and makes a commission on a securities sale and/or receives a trailer fee the advice will have some degree of bias. How that does or does not affect the client depends on the adviser and you clearly listed a number of questions to ask the prospective adviser in your post.

If you look at my previous posts you will see that I have used the word many not all in my posts. I never attacked an entire profession, said that all decisions were made for financial gain or implied that there were not any reputable or ethical commissioned financial planners. There definitely are some that act in the best interest of their clients.

I continue to believe that those seeking the services of a financial planner are better off with paying a fee for the planning and portfolio management service. In the long term their investment portfolio will show better performance with exchange traded funds (ETFs), no-load mutual funds, discount brokerage bond and stock purchases, and other products with minimal trailer fees and low management expense ratios (MERS).

Olives said...

Makes sense to me Roger.

Muriel said...

On the subject of long-term and retirement planning, I would like to recommend the book, The Pension Puzzle by Bruce Cohen and Brian Fitzgerald. I only recently took it out of the library, but so far I am finding it full of practical information, tailored to the Canadian context. I have seen the book recommended by several personal finance authors and columnists, which is why I took it out. It has full discussions of OAS and the CPP. The third edition is from 2007, so quite recent, too.

My husband and I are going to meet with an investment advisor at our credit union next week. This will be a first for us and I'm curious as to what it will be like. Our intent is get whatever we can in the way of advice and perspective, but make no immediate decisions on the spot. I hope/expect the advisor will find that a reasonable way to proceed.

We are lucky in that we both (for now at least) have defined benefit pension plans, although I won't be vested in mine for another few months. On the other hand, until recently we were both paying off large student loans, and that certainly undermined our ability to save for both a downpayment and retirement.

I was interested to to read in one of Victorianna's posts that her family had adopted a special needs child, as that is something we are contemplating, and that is part of our motivation for doing some longer-term financial planning. I am not sure yet that this is a decision we can financially afford, so I hope doing some longer-term planning and seeking professional advice will help us with at least that aspect of the decision.

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