Posted by Canadian Dream on January 20, 2011
According to a recent RBC poll 45% those 18 to 34 are not saving for retirement and only 39% of this age group have an RRSP. Well given I’m doing both and in that age group I’ll point out a few thoughts on the matter.
When asked what this group’s goals were their top responses were: reducing or eliminating debt (56%), saving for a rainy day (45%) and home ownership (44%). Well as I recall graduating from university that would have more or less been my response as well. After all when you just get out you likely have some student debt, perhaps a car payment and you are focused on saving up a down payment for your first home. Now granted you could be saving up for a home within your RRSP, but apparently that isn’t being done that much by this age group since only 6% of them have used this option.
So what gives? Why aren’t young people saving for retirement? Well I’m not a mind reader for my generation, but I would suspect that the story goes something like this: You graduate from some post secondary with debt, that debt is too big to afford a home by yourself . So while saving up a down payment you are also have to pay off most, if not all, of your student debt. Then you meet ‘the one’ you get married, which means more debt. You pay that off and meanwhile house prices in major centers (where most of the jobs are) have spiked and your inflation adjusted wage has more or less been the same as your parents. So if you are lucky perhaps by the time you are 35 you finally own your home (complete with huge mortgage) and you finally start get serious about some retirement savings. Oh, but the kids start arriving, nuts, now we need RESP’s as well.
The above tale could have described most of people I know. The exact ages of events might have changed and the order of the sequence of events, but generally that is the story. About the only difference in that tale and what I did was I always took advantage of ‘free’ money from work and joined either the pension plan or group RRSP. That way I was saving something for retirement, even before the thought of early retirement had entered my head. Also I was one of those 6% that did use my RRSP to help buy my first home. My thought was why not use it to give my money a 25 to 30% boost from a tax refund and get me into a house that much sooner. It had nothing to do with saving for retirement.
So in general I get the reasons why people don’t save in this age group. You have a lot of your plate, but the reality is that isn’t an excuse. You could be saving something for retirement or getting that ‘free’ money from work. It might be a tiny amount, but the advantage of starting young is you have time for compound interest to give you a helping hand.
Now it’s your turn, if you are in this age group how close was your story to the one I told? If you are not in this age group what was it like when you left school, do you start saving for retirement right away?
Posted by Canadian Dream on January 19, 2011
So with all the coverage on the government’s recent decision to scale back the mortgage amortization limit back down to 30 years I’ve been a little surprised on the media coverage. Most of the stories have been like this one from the Globe and Mail, which gives you the facts and not much more.
Yet if you dig around a little bit I’ve noticed a few interesting additional facts:
- As of last November, about 30% of all new mortgages had picked the 35 year amortization. So the change is actually significant for new home buyers and for those with longer memories about 6% of mortgages in Canada have 40 year amortizations (see here).
- The first 30 year mortgage only came into being in 2006, shortly afterward it was spun out to 40 years. Then in 2008 they cut the 40 year mortgage and now in 2011 in the 35 year mortgage. Doesn’t that seem like an really short time period to make all of those changes?(see here).
What happened? Well let’s do a little digging into that and find out how bad the debt situation is by looking at the source of most mortgage insurance in Canada: the CMHC. While their 2010 annual report isn’t available yet you will notice from their 2009 report a few interesting facts. In 2005, CMHC had a total liability amount of $96.6 billion, but the end of 2009 that had grown to $263.5 billion while a projection for 2010 of $311.2 billion. So from 2005 to 2009 that is an increase of 172%, wow that is some growth. Yet what is really interesting is the growth from the 2009 value to 2010 plan: $47.7 billion. Now doesn’t that seem a little huge when the projected federal stimulus for 2010 was a mere $37 billion?
You see the real story here isn’t changing the rules back but rather the change in debt. Yes while changing the rules in the first place did provide a huge boost to Canada’s economy which allowed us to ride out the recession most of the world was suffering. All that boost to GDP was basically from people like you and me taking on mortgage debt. The growth of the last five years is mostly on personal debt which is backed by the CMHC and thus guaranteed by the federal government. So if people fail to pay their huge mortgages, we just get to pay it back in taxes if the situation gets too bad (Meanwhile the banks get away with all that interest money…mmm, what is BMO’s share price this morning?).
What is more interesting is to realize that this huge growth in our housing markets is basically the direct result of letting people take on more debt. Prior to 2006, people could only afford so much and with the market had a natural limit. Once the was extend, of course people took on more debt and housing prices increased, in some places rapidly (see here for a few eye opening graphs).
Now once the mistake is obvious, that people have taken on too much debt we end up with a very large house of cards called our housing market that is facing interest rate hikes in the next year or two. Not exactly a stable situation, so after trying to warn people via the Bank of Canada, the government has had to undo the past and halt this freakish experiment prior to things exploding in their face.
Yet the final thought of the whole situation is this: had we never started this trip into super sized mortgage amortizations your housing would be much more affordable that it current is across this country. So if you have a 30+ mortgage, that is partly your own choice, but feel free to blame the government as well.
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Filed Under: Debt
Posted by Dave on January 18, 2011
This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.
My wife and I are currently car shopping or at least eliminating cars that we aren’t interested in owning. So far, we have decided on a price (around $15,000 after taxes) and a few models that we are interested in test-driving (Nissan Versa, Honda Civic, Honda Fit, and Mazda 3) as well as the features we would like in the cars. Before narrowing our choices we realized that we could “afford” almost any vehicle (meaning we could pay the monthly payments dictated by financing deals) but we don’t really value a new car or a fancier car enough to pay the premium cost of a basic, small used car.
Similar to my car decision, I could have chosen a larger house when I was shopping around a couple of years ago, but I did not need a large house and would not have used the extra square footage even if I would have bought a larger home (hence the reason I was campaigning for a tiny house).
I’m not sure how other people decide that they want or need the possessions they end up with, but from observation it seems that there is a lot of consumption without thought. Instead of going through a decision process where alternative spending/not spending decisions are examined or what the long-term use of the particular “thing” will be once it is owned – people seem to just buy now and figure it out later. I think that this unconscious spending is how everyone ends up with junk that they don’t really need because there really wasn’t a spot for in the first place.
I know that I have been, and am still guilty of making purchases like this for myself. Two months ago I bought a video game thinking I would really like to play it, but I have spent a total of 10 minutes with it since the time of purchase – it has turned into a $20 wasted purchase. I don’t make as many wasteful purchases as I used to, as I try to be more conscious of how I spend my money.
My spending decisions generally take a long time (it drives my spouse crazy), sometimes on the littlest things (less than $20) but by being “hyper” aware of my spending decisions I ensure that my consumption follows what I actually want to spend money on. Usually, it turns out that what I think I really need and can’t do without is something that would probably end up sitting in the corner of my basement where all my “stuff” goes to die before I list it on Kijiji or Freecycle or throw it out.
So, when I buy my “new” small car in a few months it will (hopefully) be a vehicle that my wife and I will be satisfied with for 6-8 years and that the $15,000 spent is “worth” the decrease in resources that it caused (a significant amount of money for us to save right now while we are paying down our mortgage).
How do you decide where to spend your money? How do you make sure that you are not wasting the money you make?
