Retirement saving: Pre-retirement case study

A couple’s huge gamble on real estate endangers their nest egg.

Photo by Brett Gundlock

THE DILEMMA: At first glance, Ashok Wagadarikar has nothing to worry about financially. With an estimated net worth of $1.2 million, the 57-year-old quality assurance manager and his wife seem to have plenty of money to comfortably retire tomorrow if they so chose. That sum should amply support their modest lifestyle, complete with trips to India to visit Wagadarikar’s parents.

However, a closer look reveals that the couple could quickly lose what they have worked so hard to build because of their risky choices in investments.

The bulk of their assets are in real estate, including the fully paid-for condo in downtown Toronto, estimated to be worth $525,000, where Ashok and 53-year-old Mukul, a hospital administrator, reside. The couple owns two other condos in Toronto they purchased as rental properties. One is occupied and producing revenue, and has an estimated market value of $625,000 with a mortgage of $260,000. The other unit is still under construction and has an estimated value of $700,000, of which they’ve paid 20% so far. To cap off the family’s real estate empire, Mukul owns a fourth property jointly with the couple’s 23-year-old son; currently under construction, its estimated worth is $800,000 and they own 5% of the equity. Both unfinished properties have gone up in value since the Wagadarikars bought them, one by as much as $120,000, says Ashok.

The Wagadarikars pull in $171,400 between them at their full-time jobs, have $80,000 in RRSPs and pensions that will be worth about $19,000 per year each for each of them. But the bulk of their savings are locked up in real estate. “I know it’s a risky thing to do, but I’ve been successful for the past years,” says Ashok. He began buying property both as a hobby and because, as a recent immigrant, he couldn’t rely on Old Age Security or Canada Pension Plan benefits. His investments have clearly paid off handsomely—so far. But it doesn’t take a financial wizard to figure out that the family’s all-encompassing trust in the frothy Toronto real estate market may be leading them to a steep fall if any part of their plan falters.

THE SOLUTION: “They’re doing it wrong,” says Warren MacKenzie, president of Weigh House Investor Services. The Wagadarikars are gambling with their future, a bet that makes little sense because the couple already has enough money to achieve their goals of travelling and maintaining their current lifestyle upon retirement without taking further risk. Depending on the real estate market’s future trajectory, the family could become millionaires several times over—but if they’re unlucky, they might not have enough to live on when they retire.

“Most informed investors believe that when interest rates go higher, as they are expected to within the next few years, condo prices will be hit very hard,” says MacKenzie. The family should stop playing their dangerous game as soon as possible.

His advice: Diversify, diversify, diversify.

¦ “If these properties are as good as Ashok thinks they are, perhaps he should sell one of them,” says MacKenzie. He suggests putting one of the units still under construction on the market prior to its completion.

¦ If the couple does sell one or more of the properties, they should put the proceeds from the sale into anything but more real estate. “It should be in blue-chip Canadian stocks, or in a GIC, or in a bond.”

¦ The Wagadarikars should have a financial plan prepared that projects their lifestyle needs, their savings and the value of all their assets. The only hiccup for this family is that a financial plan can’t predict the inevitable ups and downs of the real estate market, says MacKenzie.

¦ Families considering building a real estate portfolio like the Wagadarikars should protect themselves by forming a limited corporation and putting the mortgages under its name, he advises. He warns, however, that some banks might not issue a mortgage without a personal guarantee.