In Canada we are approaching RRSP season. When the financial institutions push us to make contributions to our retirement accounts. This yearly persuasion has established, for most people, only one way to finance their retirement.
That is to have a very large sum of money sitting in a financial institution that we can draw money out of during retirement. The vast majority of my clients have this mindset. It is a terrific way for the financial institution to make money, but may not be the best for you. I will use a real life example to illustrate.
I was helping my some in law do work on a property that he was flipping. He was in a very foul mood. So, I asked him why. He explained that he had just been to see his financial planner. His planner had told him that if he really wanted to maintain his lifestyle into retirement, he would need a minimum of $2,000,000.00 to draw from. My son in laws was upset because to do that, he would have to put about $1000.00 a month extra away in his RRSP (401K). He was already putting away a very respectable amount as it was. (Very proud of him.) He was upset because he just couldn’t put any more away, and he was worried about what his retirement would look like.
This is the typical scenario that most financial institutions put forward. Because it is very good for them. The bigger the banks long term assets are, the more money they have to leverage. Also, the more money in your account, the more money your planner makes each year. (Trailing fees) Neither of these two things are good for you. But your money makes it possible. Getting a client to put more money into their account is great for the bank and the planner.
But what about reality?? From my experience, and that of my friends, and research, your expenses, at retirement are far lower than when you are working. Your mortgage is paid off or very low, the kids are gone, so, no expenses for them, your car is paid off, you don’t drive as much, so fuel bills are lower, you eat less, so groceries are lower (just for two as well). Your expenses could be anywhere from 20% to 50% less than today. (This is the logic used for term and decreasing Life Insurance.)
That means that if you need $5,000.00 a month today, you might only need $3,500.00 a month then. The point is: Where does the $3,500.00 come from??? Using the banks scenario, it comes from this huge pile of money it took you a lifetime to accumulate. The pile has to be big enough to last your whole life. AND NO ONE KNOWS HOW LONG THAT MIGHT BE!
Is there another way? ABSOLUTELY. It will still involve the banks, but they don’t get to make as much, and your planner might have to worry more about their retirement funds. The point of retirement is that you need to have money coming in after the regular paycheck stops. Does it matter where that money comes from? NO! As long as it keeps coming in.
I presented another scenario to my son in law. Around the corner is a 14 unit apartment building for sale. Your RRSP is more than enough to cover the down payment. The place should bring in about $1,300.00 a month over cost. Now, take what you are putting into your RRSP each month plus the $1,300.00 a month from the building profit and save that for 3 years. (in a TFSA/ROTH) Then you buy another property. Repeat the savings, including the profit from the second building. Then in 2 years buy a third property. In 5 years you would have $3,900.00 a month coming in from the buildings. That supplies your monthly retirement income.
By the time you retire, you would own the buildings outright. You don’t want the work of looking after them at retirement, so you sell them. Now you can either keep the Equity (Sold – Expenses(Liabilities)=Equity) and live off of that, or since you own them out right, you may want to hold the mortgage. That way you get the down payments as cash and the mortgage payments as monthly income. This would probably be even more than your retirement monthly needs. And it is there for at least 25 years. (the standard amortization of a mortgage.) Since he was already doing extra work flipping houses, the work of the apartments would not be a change in lifestyle.
He asked me why didn’t the financial planner show this alternative? Simple. The banks and the planner don’t make as much money.
Retirement can be funded in two ways. The one the banks like, a LARGE pile of money in the bank you draw down. Or you accumulate ASSETS throughout your life which generate many small streams of income perpetually. The generating a big pile of money is less physical work. But it’s ultimate success depends on what you invest the money in, for the best return. (An average of 6% a year is the target) This requires less physical work, but no less time and attention.
Building assets, especially Real Estate, or your own business, require more physical work and time, but more often than not generate bigger returns for longer periods. The amount of money involved is very much the same.
Which method, or combination of methods, you choose is up to you and your lifestyle. Just don’t think there is only the one method. That is why I have a Life Insurance License, a Mutual Funds License, and a Real estate license. That way I can help people regardless of which method they want to use.