Should Your Home Be Part of Your Retirement Plan?

House prices have soared over the last few years, but that doesn't mean your real estate should be your whole retirement plan.

test

Real estate prices in Canada have been soaring for the past two decades and that’s been good news for retirees who have cashed out of their homes and used the proceeds to fund their retirement.

Your home should not be seen as the major source of retirement income. It’s a risky gamble – somewhere down the road, the real estate market could tumble and home prices could drop.

But, with prices now sky high and many experts, including the International Monetary Fund, warning of a housing price decline, people may be wondering if whether the sale of real estate should factor into their retirement plan.

According to a survey commissioned by the OSC, many Canadians continue to rely on real estate to fund their golden years.  The survey found that 76 percent of Ontarians 45 or older own their own home and among this group, nearly 37 percent say they are relying on the value of their home increasing to provide for their retirement.

That may be a problem, said Tyler Fleming, director of the Investment Office for the Ontario Securities Commission. “Owning a home is not a substitute for retirement planning,” he said in a press release.

So, should real estate be a big part of a retirement plan? We asked David Ablett, director of tax and estate planning for Investors Group.

  • A home is the largest single investment most people will make in their lifetime, but should owning your home be seen as a substitute for retirement planning?

    Your home should not be seen as the major source of retirement income. It’s a risky gamble – somewhere down the road, the real estate market could tumble and home prices could drop.

    For that reason and others that have to do with achieving an assured retirement income, you should plan to generate most of that income from government and private pension plans, RRSPs, RRIFs, TFSAs and non-registered savings.

    Additionally, as you grow older, you may decide, as many people have, that ‘aging in place’ is the preferable retirement option. So, for many people, their family home is a place to live in, not a place that will provide income.

  • Should you include the value of the equity in your home when calculating your retirement nest egg?

    If you sell your home, and even though the sale brings in a substantial sum, you will still need a place to live – a downsized abode, rental accommodations or a retirement home. Thus, a portion of the sale proceeds would be used to pay those expenses and they could be considerable, depending on your medical and other support needs.

    Here’s an example: If you sold your house at age 65 for $500,000, this could provide a lifetime monthly annuity of approximately $2,700, which may not be nearly enough by itself to cover your accommodation and other retirement lifestyle expenses.

  • What if you want to unlock the equity in a home? Do you take out a reverse mortgage or a home equity line of credit?

    Tapping into your home’s equity is a major decision that should not be taken lightly. Once it’s gone, it’s gone, and you may not have the financial resources to pay for needs that can arise with age – health-care expenses like in-home care, home renovations to improve accessibility, or having to move to a retirement or nursing home.

    One option for accessing the equity in a home for retirement expenses while staying in the home is a reverse mortgage. With a reverse mortgage, you can turn up to 55 percent of the value of your home into cash and you do not need to make regular payments while you live in the home – full repayment is not required until you sell. But this does result in lower estate values because the interest obligation keeps growing and the final proceeds of selling the home could be minimal.

  • Real estate has been a fast-growing asset, but what will happen to the market in the next 10 to 20 years when a person is ready to retire?

    The reality is that no one can predict what the housing market will be like in 10 to 20 years. That makes it even more difficult to decide when to sell, what your selling price will be at that time and correctly estimate the proceeds. As well, a dated home could take a long time to sell and there may be a need for expensive renovations to make it more saleable.

    Good financial advice will make the process easier and help ensure you get the most out of all your assets, including the sale of your house. A sound financial plan will help you determine how long you can live off your savings and investments and provide a realistic time frame when the sale of your house would be beneficial.

Have Questions

Our advisors will consider your financial goals and help find the path to get you there.

Find an Advisor