Retirement and Real Estate

There was a tweet tonight that kind of got me thinking. Nowadays, most of us are educated in school that we should start saving for retirement as early as possible to take advantage of the benefits of compound interest. There are lots of books that parable that concept, one of which is The Wealthy Barber, a book I read when I was probably 23 or so.

The question on Twitter had to do with the amount of money a person would need a year to maintain a roughly comparable quality of life. The number floating around was $50,000 a year, one which I think (depending on where you live obviously), would probably be sufficient for most people, assuming they own their own home. There are several rules of thumb to what that absolute number should be, one of which says it should roughly be about 75% of your final year salary prior to entering retirement.

$50,000 a year roughly translates to around $3300 or so of after-tax dollars, or around $110 a day. Obviously if you’re traveling around the world living out of expensive hotels, $110 a day doesn’t go very far. But I think most people would probably be challenged to spend that money on normal every day living (especially if you consider that bar nights and dancing on tables is most likely out at 65 years old).

Unfortunately for me, I’m hitting the retirement savings party a bit late. Given how I had $40k worth of student loans out of school, contributing a pile of money into an RRSP while my loans accumulated interest at a rate of 8% didn’t make a whole lot of sense. That being said, I have still managed to contribute slowly over the last few years into a RRSP account. And now that my loans are basically out of the way, I’m starting to focus on that again.

The good news is that I have a lot of RRSP contribution room sitting around due to my lack of contributions over the years. In fact, I’m pretty sure I have around $100k of unused room which I can take advantage of at any point. Given how my income isn’t as much out in the country as it was in the city, I don’t really have a pile of money to play with every month any more, but I should have enough to make a modest RRSP contribution for this tax year at least.

I’m also starting to think about buying a house out here. Truthfully, I’m just kind of tired of renting and watching all that money disappear every month. Right now I pay $1,100 a month in rent. Even if half of that went to the principle on a loan, that would still be a net increase of around $6,600 a year over what I’m doing now. Right now, I’m playing with a few different options.

Option one is to buy something fairly basic, at least compared to what I’m living in now. Right now I’m living in a $350k – $400k condo, which is definitely outside of my price range. So, no matter what I do, I’m going to have to get used to living in something a bit more basic when I purchase. If I set my sights pretty low, I could probably come up with enough cash to make a modest down payment on a mortgage.

Option two is to buy something a little nicer, in which case coming up with a down payment will be a bit more challenging for me. In fact, in this scenario I’ll probably have to pull my RRSPs out using the Home Buyer’s Plan and use that for a chunk of a down payment. That has obvious pros and cons.

Option three is to do nothing for another year or two. But given how interest rates are so insanely low right now, I’m not sure if that’s the smartest option.

Part of me is enjoying the process of researching all these options. But on the other hand, everyone I talk to has a different opinion on the matter, and it’s hard ultimately deciding what to do. My lease is up in January, so the point in time where I have to make a decision is rapidly approaching.