Gen Zs and millennials are buying homes later and paying vastly more, especially in relation to the income growth as mortgage costs spike higher.Chris Helgren/Reuters
An all-time great retirement savings strategy in four words: Pay off your mortgage.
Then, take the full amount of those payments – or close to it – and deposit it in your registered retirement savings plan or tax-free savings account. That’s what my wife and I did in our early 50s, and it gave us a lot of flexibility in planning our retirements.
Gen Zs and millennials will have to rejig this approach, likely by getting their mortgages paid off in their late 50s with a target of retirement between 65 and 70. But the principle remains the same: Paying off your mortgage at your career peak can release a flood of retirement savings.
If you really want to nail retirement, commit to regular savings in your 30s and 40s and let long-term compounding do the heavy lifting. If you put $5,000 in a TFSA and earn an annualized 5-per-cent return for 35 years, you end up with close to $27,600.
But even for financially fortunate boomers like us, it was hard to save for retirement in our 30s and 40s. We moved into a bigger house in our late 30s, and we piled up a lot of savings in registered education savings plans for our two boys.
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Back in the day, parents thought it was a big deal to cover the cost of university or college for their children. Now, you have to help your kids buy a home.
I would describe our retirement savings in our 30s and 40s as stretching toward adequacy, and that’s with our workplace pension contributions considered. The idea of paying off our mortgage took shape in our late 40s, in part because I thought we needed to do more for retirement. Also, getting our mortgage paid off seemed doable based on the amount we still owed.
Among the financial gifts bestowed on young boomers like us was a housing market where prices were shockingly affordable by current standards. We lived in three houses in Toronto and Ottawa in those years and none cost more than $300,000. Prices in Toronto have more than tripled since then, and Ottawa prices have more than doubled.
There was no master stroke in getting our mortgage paid – no inheritances, big bonuses or other windfalls. We did a couple of modest lump-sum prepayments using money from tax returns and such, but our best weapon was frequent use of the double-up payment.
Double-ups are extra mortgage payments, often for as little as $100, that stack on top of your regular payment. Our lender offered an online option for making double-ups, which means we could use them whenever we saw the opportunity.
The closer we came to getting our mortgage paid in full, the more motivation there was to use any extra cash to retire this debt. We could have used this money to mildly ramp up our saving instead of putting it into the mortgage, but we liked the idea of waiting a bit to unleash a torrent of retirement saving.
Making the switch to saving from mortgage payments was a test of our resolve to prioritize retirement. It was tempting to carve off a little of our former mortgage payment amount to boost our monthly household cash flow, but we decided against that. Instead, we did a dollar-for-dollar shift of our mortgage payments into RRSPs and TFSAs.
To Gen Zs and millennials, this must all sound like boomer privilege in action. Younger generations are buying homes later and paying vastly more, especially in relation to the income growth of recent decades. Also, mortgage costs for many young homeowners are spiking higher right now as renewals are made at much higher rates than we had a few years ago.
Even so, it’s still possible to map out a strategy of killing off a mortgage and rerouting the money to retirement saving. You could buy a home today at age 33, get it paid off at 58 and power-save for 10 years before retiring at 68. That may sound like a late retirement today, but it won’t be in the world of the 2060s.
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