The 3rd Five-Year Plan – A Report Card

In the fall of 2012, I started drafting the 3rd Five-Year Plan. Two years later, time for a report card. Because updating the Five-Year Plan together is even more romantic than a good coffee date.

1. When to Have Kids

Even though we haven’t done anything, I’m going to give us B because, we agreed that, before we start, we need to get married and he need to change jobs. Since he started his new job and we got married this summer, I think B is well-deserved.

2. When to Buy Real Estate

Two years ago, I said I would be open to investing more in real estate after I pay off my mortgage. Now I have paid off my mortgage but residential real estate valuation in Toronto scares me.

Since neither of us enjoy shopping and he doesn’t even care for traveling all that much, I’m pretty sure we can live comfortably on 50k per year after we retire. I’m using 2003 dollars because that’s when I made the 1st Five-Year Plan. In 2014 dollars, it’s 60k per year.

We can retire comfortably on 2mm since 2mm x 3% distribution rate x (1 – 20% tax rate) = 50k. Given 2mm net worth, how much exposure to the home would I be comfortable with? I would say 600k. The tail scenario that I use is that the home loses 1/3 of the value, so net worth would be down by 200k (i.e. 10%). In 2014 dollars, the most I would spend on the home is 750k. Am I being too conservative?

If I look at the top 20 percent in the US, average household net worth is close to 2mm. Average investment in the home is less than 400k.

Wealth, Income, and Power by G. William Domhoff

Wealth or income class Mean household income Mean household net worth Mean household financial (non-home) wealth
Top 1 percent $1,318,200 $16,439,400 $15,171,600
Top 20 percent $226,200 $2,061,600 $1,719,800
60th-80th percentile $72,000 $216,900 $100,700
40th-60th percentile $41,700 $61,000 $12,200
Bottom 40 percent $17,300 -$10,600 -$14,800

Toronto’s average detached home price closes in on $1-million! Who are all these Toronto people buying million dollar homes? Do they all think they will end up in the top 1% with net worth above 10mm? If not, how did they get comfortable with putting most of their net worth in a single asset?

We do not know the answers to these questions but we both agree that it does not make sense to invest more in real estate right now. I’m giving us A for happily putting money into GIC’s.

1997 to 2014

Spring 1997: Vendy’s family moves to Toronto and buys house; not sure if my parents actually did any financial analysis but sure seems to be a great decision in retrospect

Spring 2007: Even though I thought the market was heading towards a correction, I didn’t want my bonus sitting in GIC’s and invested in mutual funds; D’oh!

Summer 2010: Borrowed money from bank to buy condo since I was not about to sell mutual funds that just lost 1/3 of their value

Summer 2014: Sold mutual funds and achieved acceptable return relative to the price I bought them at in 2007; maybe we do get wiser as we get older because I’m not nearly as anxious about having money sitting in GIC’s; will revisit if prices drop below the dotted line

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