March 22, 2022
By Anne Levy-Ward
Do you think you need a paid-for home for financial success? And especially for a financially successful retirement? It makes sense why you might. In Canada, we’re taught that home ownership is the ultimate goal. “Renting is often an indicator of immaturity or a lack of financial stability,” writes personal finance writer Sarah Milton in the Retire Happy blog. “Buying a first home has become a rite of passage into adulthood.”
And saving for retirement is another of those responsible, adult-type things to do. For a reasonably comfortable post-career life, most of us will need to augment our government pensions.
There’s no doubt that paying off a mortgage makes it easier to save for retirement. It frees up money to invest, gives you equity, and reduces your living expenses in retirement. But what if you don’t own a house? (Or can’t because of the rising costs of real estate in Canada). Can you still save? Or will your retirement hinge on winning the lottery?
The answer is yes, you can still save.
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How are high housing costs affecting decisions to rent?
Overheated housing prices have shut a lot of Canadians – especially younger ones – out of the market. Big cities like Toronto and Vancouver have been impossibly expensive for years. And now demand from tele-workers and retirees is driving up home prices in smaller centres, too. Even if you can manage the mortgage payments, the down payment you need may be out of reach.
While homeownership may be an increasingly remote goal, a comfortable retirement doesn’t have to be. Instead of feeling discouraged about what you think you can’t have, focus on what you can.
Why do people rent instead of buy a house?
Many perfectly mature and responsible people choose to never buy a home. Why? There are many reasons:
- Some jobs, like in the military or resource sector, mean moving is frequent.
- Others might get a house with their job, like some members of the clergy.
- Renting gives flexibility as careers progress or families expand or contract.
- You might love a picturesque Victorian rental but are happy to let a landlord deal with repairs.
- Other priorities, like building a business, are more important.
In many parts of the world, renting is the norm. And it’s not just lower-income people who are renting, either. Statistics quoted by the World Economic Forum in April 2021 bear this out. In prosperous Switzerland and Germany, for example, nearly 7 out of 10 adults surveyed are renters. Compare that to Canada, where just over 4 out of 10 rent.
What are the benefits of renting for retirement savers?
Whether you rent by choice or by circumstance, when it comes to saving for retirement you have two major advantages over homeowners:
- You’re not subject to the effects of rising mortgage interest rates.
- You can start saving for retirement right away. (Unlike many homeowners who delay retirement saving until they’ve paid off their mortgages.) That will earn you years of compounded growth you might have otherwise missed.
How can renters save for retirement?
If you rent, here are three methods to save for your retirement:
1. Rent only as much as you need, not as much as you can afford.
That means if you only need two bedrooms, don’t rent a place with three. If you can get to work easily enough from midtown or the suburbs, don’t rent downtown. Do you absolutely have to live in the hippest, most fashionable part of town? If not, rent somewhere less trendy and less expensive.
The result? You can save the difference between the most you could pay and what you do pay.
2. Pay yourself first.
This ancient wisdom is particularly helpful for renters. If you’re not being forced to invest by paying down your mortgage, it’s tempting to spend on other things. Instead, arrange for an automatic transfer to your retirement savings account on payday.
The result? You don’t have to choose between saving and spending every month.
3. Think long term.
Do you love where you’re renting now? Do you have a good relationship with your landlord? If so, try negotiating a longer lease. Some landlords are willing to lower your rent to avoid finding a new tenant every year.
The result? You can put the monthly difference between the longer- and shorter-term leases straight into your savings.
Not buying a house? What can you do with your savings?
If you’ve already saved some money for your down payment, don’t worry. Your savings are not a waste and can give you a real advantage.
If you give up on home ownership, you can:
- Take your down payment fund and invest it for your retirement.
- Then, look at the difference between your rent and what you figure you would have spent on a home.
- Milton says expenses like condo fees, utilities, property tax and upkeep can cost as much as your mortgage payment. Invest at least some of that difference, too, regularly and faithfully.
- Arrange for automatic transfers to your investment account, to help stay on track.
If you did buy a house, it might take 25 or 30 years to pay off your mortgage. So, by renting for those years, you can still wind up with some very healthy retirement savings.
Ready to start saving for retirement?
Whether you have some savings already, an advisor can help you set your financial goals and make a solid plan to help you reach them.
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.