I’ve been a big fan of Garth Turner, who blogs over at Greater Fool, for a few years now. He’s a big proponent of creating cash flows for retirement. Towards that end, he has written many, many persuasive posts about why people should sell their homes, invest the equity, and live off the investment income.
It’s not necessarily a bad plan. For a very long time, I thought it was a great plan.
But…
Lately, I’ve come to question how feasible this plan is for everyone who owns a house. If you’ve been in Vancouver or Toronto for a few decades, then your house could likely sell for a high 6-figure amount, possibly even a 7-figure amount. And if you’ve been there for a few decades, then hopefully your mortgage is gone.
Take that sweet, sweet cash and invest it – in a properly balanced and diversified portfolio, a la Garth Tuner. Now you’ve got cash flow coming in from your investment portfolio to pay your rent. If you’re really fortunate, your investments might even kick off enough money for you to live on. Easy, peasy, lemon-squeezy!
Yet I still have doubts…
My only concern with Mr. Turner’s advice is that not everyone has a home that, when sold, will generate enough money to live on. If a person’s in that situation, and sells, then they face the prospect of ever increasing rents. While their portfolio is growing in the background (hopefully!), it’s quite conceivable that their rental increases outpace the growth of their investment income. In this situation, portfolio income isn’t enough to pay your rent. Mr. Turner’s plan no longer works.
Are people really in a better situation if they’re renting and their employment income has to go towards rent, instead of towards buying more investments, because their portfolio’s returns won’t cover the bills?
In that situation, isn’t the portfolio more like a part-time job than a reliable cash-flow on which one can live and eventually retire? And I use the term “part-time job” to convey the idea that, while the income from a part-time job nice to have, the annual amount of money generated isn’t enough by itself to keep body and soul together.
And if their employment income and investment income are both used to pay the rent, then what happens when the employment income goes away?
Then they’re without a home, and their portfolio’s not generating enough money to cover all that needs to be covered.
Renting might not be the answer
One of my greatest financial fears is being an elderly person who rents. Once employment stops, then all expenses have to be covered by pension payments and investment returns. Pensions are disappearing at an incredibly rapid clip. Investment returns aren’t guaranteed, even if you’re one of the lucky ones who managed build a multi-million dollar portfolio before retirement.
It seems to me that a paid-off home is a cornerstone of a secure retirement. People who own their own homes don’t have to be concerned with rental increases or eviction. They can stay in their homes for as long as their health will allow.
This is great!
And yet…
Houses are so damn expensive today! Even if you’re not in Vancouver or Toronto, a $350,000 house isn’t exactly cheap when you’re earning less than six figures. If it takes you 20-25 years to pay off your mortgage, and your employer isn’t promising you a pension, when exactly are you going to have that extra money to set aside in an investment portfolio?
If you’re not one of the people who earns enough money to pay off a mortgage while simultaneously saving for retirement, then maybe Garth Turner is right.
After all, you might avoid rental increases and eviction but let’s face facts. A paid-off house won’t help you buy groceries and heat and medicine in your dotage. Reality being what it is, a person cannot spend their house one doorknob at a time in order to buy what they need, when they need it. Only money can be spent on stuff. A paid for house represents locked-in money. It’s money that cannot be invested or spent unless the home is sold or otherwise mortgaged.
So what’s the right answer?
I have no idea. The older I get, the less I really know for sure.
For many people, housing is ridiculously expensive and it requires a paycheque-to-paycheque existence until the mortgage is gone. Funding one’s own retirement by creating a reliable cash flow is also ridiculously expensive, yet it’s a task that few of us can afford to ignore.
I can certainly see the allure of living off of investment income after liquidating the equity in your home. But so many things have to go right for a very long time for this plan to be feasible. One, you have to properly invest the money. Two, you have to hang on to your investments even when the market drops during a recession. Three, you have to know what to do when black swan events have a negative impact on your portfolio.
Yet, I can also see the hazards of spending most of your working life paying for a house. One, you don’t have significant retirement savings because it took so long to pay off your mortgage. You didn’t have enough time to re-direct your former mortgage payments towards your investment portfolio. Two, you’re making a long-term bet that you’ll always have an income over the 20+ years it might take you to pay off your mortgage. Three, you forever foresake the growth that your money could’ve provided had you invested it in a well-balanced & diversified portfolio.
Again, I don’t know what the right answer is. By way of this article, I simply want you to be aware of the options, the benefits, and the drawbacks. Start figuring out what’s best for you and for your future.
Whether you choose to rent or you choose to own, make that decision with your eyes wide open and fully aware of the opportunity costs of your choice.