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Why a mortgage that leaves room for retirement saving is a must-have

The cost of owning a house and starting a family just might be the lost opportunity to get a good head start on saving for retirement.

With the March 1 deadline for contributions to registered retirement savings plans just ahead, it's a good time to look at how to balance life's biggest financial responsibilities. Home ownership, starting a family and retirement saving – can you do it all?

In cities with reasonably priced housing, you certainly can. But in expensive markets such as Toronto, Vancouver and their satellite cities, only high earners will manage this balance. Something will have to give in the household budgets of everyone else, and it's probably going to be retirement saving.

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There's more to this than the average $770,745 cost of a home in the Toronto area last month, or the average $878,242 in Vancouver. These cities are expensive to live in, and that means you'll pay more for things such as daycare. Toronto's median infant-care costs run about $1,650 a month, while Vancouver is at $1,320. In cities such as Winnipeg, Ottawa and Halifax, where housing is more affordable, infant care averages in the $650 to $1,000 range.

This brings us to a major omission in most housing-affordability calculators, and analysis that lenders do to see how much house you can handle. They simply compare your income with your housing-related costs and other debts beyond your mortgage. They don't consider the cost of kids or the new-car loan you might take on, and they most certainly don't consider the need to save.

For a much more realistic take on home affordability, try our Real Life Ratio calculator. It offers some insight on how well you can balance the cost of home ownership, plus car loans, daycare costs and saving for retirement.

Try the RLR calculator using a savings rate of 10 per cent of your household take-home pay, which is a sensible threshold for a young adult. Ten per cent of gross pay would be a more aggressive goal, but young adults getting an early start will be okay using net pay as a base.

Is it really such a big deal if a young family can't afford to save for retirement? Can't they just catch up in 20 to 25 years, after their mortgage is paid off? The retirement catch-up plan worked fine decades ago, but it's getting riskier.

One reason is that many young people are working on a contract or temporary basis, without pensions of any kind. They'll need to save longer and harder than their parents did for retirement.

We're also living longer, which means we'll need to put away more money for retirement. If you don't have a pension and you have a good chance of living to 95, starting to save for retirement at the age of 55 might be problematic.

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People who bought a first house in the 1980s or the early 90s had their hands full saving for retirement because of high interest rates. But whereas these buyers got to enjoy steadily falling rates in the ensuring years, today's buyers will likely face rising costs over the decades it takes to pay off their mortgages.

What, you think rates will stay this low forever and ever? If they do, we'll be living in a stagnant economy that limits both interest rate increases and pay hikes. You won't be able to count on rising prosperity to help you find money for retirement saving.

If you're looking for a first house, use the Real Life Ratio calculator to see whether retirement saving will fit into your budget. If 10 per cent of take-home pay isn't possible, what about 7 per cent or 5 per cent? Just $300 invested monthly over 35 years would produce just more than $272,000, assuming a fairly conservative 4-per-cent rate of return after fees.

The longer you wait to save for retirement, the more you have to save. At an average 4 per cent annually, it would take monthly contributions of $1,850 over 10 years to get close to $272,000. Why put that pressure on yourself? Start your retirement preparation early by buying a house with that most desirable of features, a price that leaves you with money left over every month for saving.

How this millennial manages to afford a home with a $31,000 net income
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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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