Rent vs. Buy a Home. What's the best choice?

Investing articles can be long and boring.  How about I read the article and provide the important information for diy investing success. 

Here it is.

From the National Bank of Canada:

"In the long run, homeowners often fare financially better than renters because homeownership enables forced savings that accumulate over the years, growing into a sizeable nest egg."

"homeowners were “distinctly better off financially compared to tenants” with similar age and income profiles."

"when the principal repayment is netted out, the cost of ownership is less than renting in most combinations of housing types and locations."

 "owning enables households to select more desirable neighbourhoods, for example superior-quality school districts, where rental units may be few or non-existent."

Think you can rent and save the leftover?  Maybe you can today and next month, but your life changes and you may slip up 5 years from now.  It's probably too difficult to have extra cash in your wallet at the end of every month and force yourself to invest that money instead of spending it.

I will be encouraging my children to buy their own homes as soon as they are settled and have decided they will probably not be moving great distances to pursue job opportunities.


Read it here, if you'd like (but I've explained or highlighted all the important stuff).

https://business.financialpost.com/personal-finance/the-haider-moranis-bulletin-no-right-answer-to-rent-or-buy-debate-but-theres-no-question-who-ends-up-ahead

How Paying 1% In Fees Can Cost You A Fortune - Advice From Warren Buffett

Mr. Buffett’s annual letter to shareholders is out.  I’ve read the letter for you and am highlighting the most important point.

Here it is:

1.  Buying a low cost index fund that tracks the whole market would have returned an annual return of 11.8%(pre-tax) over the past 77 years.
2. Paying a 1% annual fee to an investment manager over this 77 years period would have cut your final cash balance by 50%!

(Background information:  Mr. Buffett’s first stock purchase was 77 years ago for $114.75)

If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019.  That is a gain of 5,288 for 1.

Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3 billion.

Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to investment managers, its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.

Click below to read the letter.

http://www.berkshirehathaway.com/letters/2018ltr.pdf

WHY THE 70% RULE DOESN’T MAKE SENSE

WHY THE 70% RULE DOESN’T MAKE SENSE


If you listen to mutual fund sales people and most of the mainstream media, you will often hear that people need to replace 70% of their income when they retire. We’ve already discussed why that number is not accurate. The point of this post is to show you exactly why saving to make up 70% of your working income is not necessary.

Let consider the following example.

For a family making $110,000 per year. If they want to live on the same amount of money as when they were working , they will need to save 6% of their income from ages 30 to 65. That would work out to retirement income at 50% of their working income.

If, instead they strive for 70% of their income, they would need to increase their savings from 6% of annual income to 12%, or $13,000 per year. That would mean a significant reduction in spending in their working years (roughly $7800 a year for 35 years).

So during their working and child raising years, they would have only $40,200 a year to spend, after taxes, mortgage, childcare costs instead of $47,000.

When they retire, they would have $65,000 per year to spend, after paying 15% in taxes. That represents 62% more money per year available to them for spending after retirement.

But at what cost? For 35 years, they scrimped and saved, probably not spending on meaningful experiences so they could spend more in retirement. Does this make sense to anyone? Does someone really need to boost spending by 62% at retirement. I know retirees like to travel more, but you can end up saving too much and perhaps missing out on the pleasures that money can sometimes buy.

3% Withdrawal rate appears almost bulletproof to avoid running out of money

Investing articles can be long and boring.  How about I read the article and provide you with the important information for DIY investing success.

Here it is.

If you have the misfortune of retiring when the stock market peaks and you see a big decline in your first few years of retirement, the safest way to ensure your money doesn't run out before you die is to reduce your withdrawals to 3% of your total portfolio value.  So if you have saved $500,000, you withdraw $15,000 to spend this year.  Keep doing the same thing every year growing only for inflation each year.  You will continue to collect and spend your CPP and OAS and any other work or government pension you are entitled to.

Turns out the 3% withdrawal rate is fairly bulletproof to last for your entire life.

Click below to read the full article (you must have a Globe and Mail subscription)

"If you’re nervous about how long your money will last in retirement, you might adopt a withdrawal rate near 3 per cent to include a margin of safety while sticking with low-fee funds. Similarly, being able to tighten one’s belt in hard times or having a part-time job can really help portfolio longevity."

HOW ACTUARIES COME UP WITH THE 50% RULE

HOW ACTUARIES COME UP WITH THE 50% RULE



Many people are surprised when they are told that they can have the same standard of living in retirement as their working years with only 50% of their working years income.

Thankfully, actuaries have researched the spending habits of working age and retired Canadians. I’d like to provide you some evidence of their 50% rule conclusions to help convince you of its accuracy.

First, we will look at the assumptions (taken from Fred Vettese’s The Real Retirement) made when coming up with the 50% rule.
Assumption#1: Married couple with 2 children who own their own home.
Assumption#2: Mortgage costs are averaged over a 30 year period. Child raising costs are averaged over 35 years.
Assumption#3: Income tax, Canada Pension Plan contributions and Employment Insurance contributions are 23% of gross income.

Let’s look at the family making $110,000 per year.

Gross Pay:                  $110,000
Taxes, CPP, EI:              25,000
Child raising costs:       13,000
Mortgage:                      20,000
Savings (6%)                    6,600

Remaining                    $45,400 or 41% of Gross Pay

What does this mean? Only 41% of your gross pay is available to you for regular consumption when you are paying off your mortgage, raising your children and saving for retirement. 59% of your income goes to fixed costs that will eventually disappear. If you managed to live for 35 years with only 41% of your gross income, think how wonderful you’ll feel living on 50% of your income in retirement!

One Big Thing: 74% of Retirement Success is the result of enough savings. Nothing else required.

Investing articles can be long and boring.  How about I read the article and provide you with the important information for DIY investing success.

Here it is.

Don’t obsess over which ETF is better, how much should you allocate to bonds vs. stocks, should you use a RRSP or TFSA, is rebalancing important, etc…

Just save! 6-10% of your pay each and every year from age 25 to 65.

The full article:

“The American Society of Pension Professionals and Actuaries (ASPPA) has an answer.  They published an article in 2011 where they found that 74% of retirement success had to do with one thing: savings rate.  The other 26% was explained by asset allocation and related decisions.”

One Big Thing: 74% of Retirement Success is the result of enough savings. Nothing else required.

Investing articles can be long and boring.  How about I read the article and provide you with the important information for DIY investing success.

Here it is.

Don't obsess over which ETF is better, how much should you allocate to bonds vs. stocks, should you use a RRSP or TFSA, is rebalancing important, etc...

Just save! 6-10% of your pay each and every year from age 25 to 65.



The full article:

"The American Society of Pension Professionals and Actuaries (ASPPA) has an answer.  They published an article in 2011 where they found that 74% of retirement success had to do with one thing: savings rate.  The other 26% was explained by asset allocation and related decisions."

What Retire at 40 Years Old Really Means

There are many blogs providing advice for young people on how to retire early. Basically, their advice boils down to 2 things.

1. Save a large chunk of your income while working in your 20’s and 30’s. By large I mean around 60 or 70% of your income.
2. Plan to live a very modest lifestyle when you “retire” until you become eligible for government social security in your 60’s. By then, you will have become so accustomed to living frugally, nothing will seem different to you compared to the masses who retire from work at age 65 and need to adjust to a reduced income lifestyle.

There is nothing wrong with the advice on these blogs. I’ve written before that my blog will be different but I wanted to add one more thing about the whole retire early phenomenon. Namely, many of the writers of these retire early blogs didn’t actually retire.

I’ll explain using Mr. Money Mustache as an example. He is probably the most popular early retirement blogger in North America. He and his wife quit their jobs as software developers when their son was born. The family lived very frugally while working and set aside much of the family income. They also planned to maintain a low consumption lifestyle while not working for any company. But what they didn’t do was retire from work.

Instead Mr. Mustache starting buying, renovating and selling homes in his neighbourhood. He also started and maintains his very successful blog. Mrs. Mustache became a real estate agent. I would not be surprised if they put in just as many hours “working” now as they did when they were software developers.

So is this actually early retirement? It’s more like freedom to work at things you want to work at, when you want to work. Nothing wrong with that. In fact, this freedom and control would probably go a long way to improving happiness for many stressed out corporate 9 to 5ers.

The point is you can’t expect to save some money until you are aged 40 and then spend the next 50 years relaxing in the sun. That is not realistic and probably not healthy for the vast majority of us.

WHAT RETIRE AT 40 YEARS OLD REALLY MEANS.

WHAT RETIRE AT 40 YEARS OLD REALLY MEANS.


There are many blogs providing advice for young people on how to retire early. Basically, their advice boils down to 2 things.

1. Save a large chunk of your income while working in your 20’s and 30’s. By large I mean around 60 or 70% of your income.
2. Plan to live a very modest lifestyle when you “retire” until you become eligible for government social security in your 60’s. By then, you will have become so accustomed to living frugally, nothing will seem different to you compared to the masses who retire from work at age 65 and need to adjust to a reduced income lifestyle.

There is nothing wrong with the advice on these blogs. I’ve written before that my blog will be different but I wanted to add one more thing about the whole retire early phenomenon. Namely, many of the writers of these retire early blogs didn’t actually retire.

I’ll explain using Mr. Money Mustache as an example. He is probably the most popular early retirement blogger in North America. He and his wife quit their jobs as software developers when their son was born. The family lived very frugally while working and set aside much of the family income. They also planned to maintain a low consumption lifestyle while not working for any company. But what they didn’t do was retire from work.

Instead Mr. Mustache starting buying, renovating and selling homes in his neighbourhood. He also started and maintains his very successful blog. Mrs. Mustache became a real estate agent. I would not be surprised if they put in just as many hours “working” now as they did when they were software developers.

So is this actually early retirement? It’s more like freedom to work at things you want to work at, when you want to work. Nothing wrong with that. In fact, this freedom and control would probably go a long way to improving happiness for many stressed out corporate 9 to 5ers.

The point is you can’t expect to save some money until you are aged 40 and then spend the next 50 years relaxing in the sun. That is not realistic and probably not healthy for the vast majority of us.

Real Research From An Expert Who Isn't Trying To Sell You Anything

 

Malcolm Hamilton is currently a pensions expert and senior fellow at the C.D. Howe Institute. This is his retirement gig. For most of his career he was a actuary working with Mercer.

He is an expert on pensions and retirement savings and has been studying these areas since the 70’s.

He does not sell financial products. Rather, he spends his days teaching about retirement and hopefully correcting the misinformation pushed on to the public by financial marketers. Financial marketers try to convince you to save 15% of your income just like other marketers try to convince you that you need a BMW or Mercedes.

Malcolm Hamilton’s key takeaway is simple. Saving 15% of your working income for retirement means you will have a lot more money to spend in retirement than while you were working and raising the children.

If you can spare the time, and I highly recommend you do, watch this video. Malcolm explains, using real research, why most of what you hear about retirement savings is misleading. This is stressing people out without reason and probably leading to bad financial decisions being made by Canadians.

http://www.moneysense.ca/save/retirement/retire-rich-malcolm-hamilton-on-how-much-canadians-are-saving

REAL RESEARCH BY AN EXPERT WHO ISN’T TRYING TO SELL YOU ANYTHING

Malcolm Hamilton is currently a pensions expert and senior fellow at the C.D. Howe Institute. This is his retirement gig. For most of his career he was a actuary working with Mercer.

He is an expert on pensions and retirement savings and has been studying these areas since the 70’s.

He does not sell financial products. Rather, he spends his days teaching about retirement and hopefully correcting the misinformation pushed on to the public by financial marketers. Financial marketers try to convince you to save 15% of your income just like other marketers try to convince you that you need a BMW or Mercedes.

Malcolm Hamilton’s key takeaway is simple. Saving 15% of your working income for retirement means you will have a lot more money to spend in retirement than while you were working and raising the children.

If you can spare the time, and I highly recommend you do, watch this video. Malcolm explains, using real research, why most of what you hear about retirement savings is misleading. This is stressing people out without reason and probably leading to bad financial decisions being made by Canadians.


http://www.moneysense.ca/save/retirement/retire-rich-malcolm-hamilton-on-how-much-canadians-are-saving