If you are like most people, you probably believe that being mortgage free is your best plan for retirement. That means paying off your mortgage as fast as possible becomes your priority and having other forms of investments are considered only after your property is paid off.
But this is not necessarily the best approach. It is important to decide which options will give you the balanced diversification to protect you from real estate market and economic fluctuations.
Many Canadians think of retirement as time filled with traveling, spending more time on hobbies and interests. But in order to be able to do that, there are a lot of factors that need to be taken into consideration when planning for your retirement. Too many Canadians are thinking of their current financial needs and not as much about retirement until the later years.
There has also been an increase in life expectancy as health-care technology is advancing. Canadians are more aware about their health and are taking better care of themselves, which means seniors are living longer. As a result, seniors now have to save more for their retirement than their predecessors. It is important to have a retirement strategy that works for you by exploring different ways that work with your lifestyle and goals.
One strategy is to be mortgage free, so that you will have minimal property expenses when you retire and have 100 per cent 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 towards your mortgage or increasing your payments regularly, you will shorten the life of your mortgage, yet you are not investing as much as you could into your RRSPs.
Here is the best of both worlds. By investing in your RRSPs, you pay less tax and you’ll get a refund and with that money you could make a lump-sum payment on your mortgage every year.
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. Therefore 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 vehicle to help with your retirement goal.
The Smith Manoeuvre
Another idea is doing the Smith Manoeuvre. This means using the HELOC for short- and long-term investments. If you do short-term, these would be 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.
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. A comprehensive strategy can be put in place by working with your mortgage expert, financial adviser and accountant.