Is being mortgage-free your plan for retirement?

Most people believe that being mortgage-free is their plan for retirement. That means paying off their mortgage as fast as possible becomes the priority, with other forms of investments considered only after the property is paid off.
If this sounds like you, then it is important to decide what option will give you balanced diversification and protect you from the real estate market and economic fluctuations.

One strategy is to be mortgage-free, and that you will have minimal property expenses when you retire and have 100 percent of the value of your home in equity. You will then have extra funds when you decide to downsize to a smaller home. But by putting all of your eggs in one basket, you could be limiting the ability to use other investment options that could give you a higher return on investment, and would help you achieve your retirement goals faster.

By focusing on making extra payments and lump sum payments on your mortgage or increasing your payments regularly, you would shorten the life of your mortgage, yet you are not investing into your RRSP’s or other investments.
Here is the best of both worlds: By investing in your RRSP’s, you pay less taxes and get a refund, and with that money, you could make a lump sum payment on your mortgage every year.

Take advantage of a HELOC

Another option would be to put the equity in your home to work for you by using a HELOC (a home equity line of credit). This will give you access to your equity whenever you need it and would be a perfect investment vehicle.
Having a HELOC separate from your actual mortgage gives you the flexibility to use it for investment purposes, so the interest you pay on funds that are drawn from the home equity line of credit are tax deductible.

Here are some investment ideas: Use the funds from the HELOC to purchase an investment property, and with the rental income, you could cover the mortgage payments and property costs. The rental property would then pay for itself and you have a vehicle to help with your retirement goal.

Another idea is doing the Smith Manoeuvre. This means using the HELOC for short and long-term investments. If you do short-term, high-return investments that when cashed, help you pay off the line of credit, any extra money you have made will allow you to make a lump sum payment on your original mortgage.

Seniors are living longer

Many Canadians think of retirement as a time to travel and spend more time on hobbies and interests. However, in order to be able to do that, there are a lot of factors to consider when planning for retirement.

Canadians are more aware about their health and are taking better care of themselves, which means seniors are living longer. According to Statistics Canada, males have an average life expectancy of 79 and females of 83.

As a result, seniors now have to save more for their retirement than their predecessors. Four in 10 Canadians age 55+ say there is a serious risk that they will outlive their retirement savings. An additional 40 percent of seniors will still be in debt after the age of 65, according to The Vanier Institute of the Family.

The cost of long-term care is significant. Benefitscanada.com reports that baby boomers currently account for 33 percent of the population and 14 percent are over the age of 65. Based on today’s trends and demographics, by 2036, 25 percent of the population will be over the age of 65.

Since life expectancy has increased, long term care costs need to be taken into consideration. Pensions are low and most people are not saving enough for retirement. It is important to have a retirement strategy that works for you by exploring different ways that work with your lifestyle and goals. A comprehensive strategy can be put in place by working with your mortgage expert, financial adviser and accountant.