In a very well-written article in The Financial Post, Ian Lee and Vijay Jog argue that new financial instruments like reverse mortgages are a much better solution to the Canadian retirement saving problem than the government taking larger contributions to the Canada Pension Plan (CPP). And these guys know what they’re talking about. Jog is the Chancellor Professor for the Sprott School of Business at Ottawa’s Carleton University, while Lee is an Assistant Professor at the same school.
The Flawed Argument for an Increased CPP Contribution
Pension experts are pushing for a major expansion to the Canada Pension Plan since they consider the collective retirement savings of Canadians to be inadequate. However, Lee and Jog make the point that the calculations of those inadequate retirement savings are not taking home equity, real estate investments, and business investments into account. This means that the argument is inherently flawed since these experts are leaving a big chunk of change on the table.
Why CPP Is the Last Place You Should be Parking Your Cash
The Canada Pension Plan adds up to a decent supplement for many seniors who have been working all their life for someone else. However, paying more than the mandatory CPP amount is not a good idea for various reasons. If you’re younger, you could be investing that money, using up your RRSP or TFSA limits each year, making investments in real estate or stocks that you choose, or paying down your debt and mortgage. In short, there are a lot of things you could do with your money rather than parking it in the CPP.
The Stability of the Canada Pension Plan
People who argue that the CPP isn’t stable and may be in danger often get shot down by economists, and rightly so. However, consider all the changes to other retirement vehicles that have not benefitted seniors, such as the elimination of the benefits of income trusts and other measures that have been introduced in our lifetime. As has been shown with corporate pensions, often that pot of money can be too tempting to not dip into. That doesn’t mean that it won’t be there for you when it comes time to receive your CPP cheque, but having control over your own funds and savings is always a better idea. Not to mention that a larger mandatory CPP contribution would take money directly out of the pockets of Canada’s working families that they may desperately need for the necessities of life, never mind savings.
Reverse Mortgages and Retirement Savings
One thing the pension experts get right is that collectively, we’re probably not saving enough for retirement. With rising rents, home prices, and repayment of student loans, many younger Canadians see retirement savings as a far-off dream. Even the smallest amount of savings, like $100 a month, could help younger Canadians get into the habit of saving for retirement later on and help them build at least a small foundation for those savings. What they can do in the immediate future to build their quality of life and plan for retirement is buy their own home. The authors argue in the article that most Canadians view a home as a nest egg for their retirement years, and reverse mortgages have made it easier for them to tap into this equity.
Is a Reverse Mortgage Right for You?
If you’re 55 or over and own your own home, you can get a reverse mortgage. Of course the traditional model of building a savings portfolio for retirement is the best way to go, but with the financial obligations of the 21st century that traditional model is not being adhered to by most Canadians. Essentially, the thrust of the article is that there is nothing wrong with viewing your home as a nest egg for retirement, despite what sticklers of the traditional model may have to say about the matter. So if you don’t have a million dollars in savings or a pension to provide for your retirement, a reverse mortgage is a viable financial instrument.
Contact Horizon Equity to find out more about reverse mortgages, and how they can fit into your retirement portfolio.