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Is your principal residence your retirement plan?

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Yesterday marked the one too many times when I heard someone’s retirement plan being their principal residence. I understand the Greater Vancouver Area (GVA) can be expensive in terms of housing cost. You can all see my mortgage and principal residence value in my Net Worth. I also understand that looking at what you may need in the future when you retire can be daunting. However, relying on your principal residence value should not be your only plan, it should be your back up plan in case plan A fails.

There is still hope!

It’s not like I hear this from people near their 60’s. Most of them aren’t 40 yet. There are still ways to plan for retirement and save money. You need to have a saving plan.

  • Pay yourself first.
  • Reduce spending.
  • Seek advice.
Then learn to make your money work for you.
  • Leverage and understand compound growth.
  • Learn about different investing strategies; dividends, index and so forth.
  • Seek advice.
  • Keep it cool and avoid get rich quick schemes. They’ll usually set you back.
In both cases, you can see I recommend to seek advice. It’s probably the most important step you are going to do.

Why it’s dangerous

Here are some reasons that makes it dangerous to rely on your principal residence:

  • Lots of emotions will be tied to that residence. You may change your mind, or the addition of grand-kids may change your mind.
  • The value of the property is not guaranteed along with all the other costs associated with selling and getting a new place.
  • The cost of the next property or location is undefined … and unknown and that cannot guarantee what’s left for retirement when you sell you principal residence.

When it may work

There is one instance where I heard the plan and I thought it may work. In this case, the family already bought a condo in downtown to retire in. In the meantime, they are renting it while they enjoy life in their big house. In this case, the cost of getting a new place has been eliminated up front which reduces many unknowns.
Readers: Is this a retirement plan you hear about?
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6 Responses to "Is your principal residence your retirement plan?"

  1. TinyPotato says:

    I hear this much too often.

    The funny thing is I find it somewhat contradictory to the reasons why some people pay these crazy house prices in Vancouver.

    When making the "buy" decision one of the reasons cited is "when I retire I won't need to pay rent" or "I won't be forced to move"

    BUT, a house doesn't generate cashflow, it can't pay the grocery bills or pay for the phone bill. So when it comes time to retire, people may need build an investment portfolio by selling the house ("forced to move") and possible even rent!

  2. The Passive Income Earner says:

    Human behavior will always be intriguing! There are so many people willing to shelve large sum of money or significantly compromise in order to live near the beaches and trendy areas. I used to rent downtown Vancouver, 2 blocks from work and I paid 675$/month. As my family grew, we moved further out to keep rent cost manageable until renting vs buying became a decent problem to have in terms of where my money was going.

  3. Financial Cents says:

    Using the house for retirement is something I hear (and read) quite a bit. I certainly wouldn't advocate it. No doubt a paid off home is equity, lots of equity and assets are always good, but I don't plan to have only that egg in my equity basket :)

    Kinda goes against diversification and basic risk management principles.

    Thoughts?

  4. Invest It Wisely says:

    "Yesterday marked the one too many times when I heard someone's retirement plan being their principal residence"

    This is one of the few good points by Kiyosaki that you can take away from "Rich Dad, Poor Dad". The danger here is that an expensive house also means expensive costs, and a long-run return of not much above inflation. A house can play a part, but for those who rely solely on that and then use reverse mortgages to access the equity, I think it's dangerous.

  5. Andrew Hallam says:

    Kevin,

    I take it you're not a huge fan of Kiyosaki? But like you,I figure he's right on that premise too: your home residence is not an investment; it's a liability.

    Kiyosaki sure has made an empire of books and products, hasn't he? A decent writer could boil down all of his book's knowledge into a single chapter, don't you think?

    I suppose if a person lived in Vancouver, bought a house with mortgage costs, taxes and maintenance costs there that were lower than rent, and if they then moved to a small town in Saskatchewan or Montana, then they could "sort of" consider their home as an investment if they sold it to move into a $250K home.

    Anyone agree? Disagree?

    Nice post Passive!

    Andrew

  6. The Passive Income Earner says:

    I agree that a residence is a liability as it doesn't generate any income. At least switch to a mortgage helper (house with a rental suite) if you want to make it an asset :) Even in this case, I would not consider the house a retirement plan. The rental income can be part of a retirement income though.

    I'd have to say that using your property as a retirement plan should be considered plan B or plan C. Your plan A should be less risky and based on old fashion saving to get started.

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