Is Your Home Your Retirement Plan?

Is your home your retirement plan? If so, you should really consider the risks that come along with this plan.

Given today’s high house prices and since a large part of Canadian’s monthly budgets are being used for mortgage payments, it’s understandable how they’ve come to this decision.

A recent study found that 49 per cent of Canadians plan to sell their home to fund their retirement income needs and an astounding 45 per cent of pre-retired homeowners aged 45+ are relying on rising home prices to meet their retirement requirements. Of the above 45 per cent mentioned, almost all stated that they have no investment savings other than their house.

Your home may in fact be able to provide you with some retirement income, but you need to consider a few things:

#1 – Household debt: Funding your retirement with your home assumes that your house is paid off by the time you retire. The latest numbers I could find show that one in four Canadian retirees still have debt in retirement and many are still making mortgage payments once they stop working. If this is the case, your home may be an additional financial burden when you retire and not the asset that you’d hoped it to be.

#2 – Ability to access money: While you’re at work and struggling to save, the idea of selling your home once you retire sounds ok. But when the time finally arrives, many retirees don’t want to leave their home. A “home equity line of credit” or “reverse mortgage” type product may help access some cash, but both carry some significant downsides and costs. For those who are willing to sell, many find that the cost of moving and “downsizing” to a new home doesn’t free up as much equity as they thought.

#3 – Housing market timing: Whether you’re ready to admit it or not, the housing market is in fact cooling down across most of the country. Here in the Okanagan, inventory is way up and the sales volume is steadily dropping. Higher interest rates, tougher mortgage rules, non-resident buyers’ taxes and lower affordability are all factors that will remain for some time. This current situation is not unique either, the housing market will always go through cycles with highs and lows. If you happen to be ready to retire during a low, it may be a lot harder than planned to access your home’s equity.

#4 – Living expenses may increase: Many empty nesters are assuming that they’ll be able to downsize once the kids move out and that extra home equity will be ready for their income needs. Health-related issues may not make this possible either. Your smaller and cheaper housing plans may be overshadowed by higher health care costs and even expensive assisted living arrangements which can quickly eat up all the home equity that you’ve built up.

A well-constructed retirement plan is all about balance and contingencies for the “what ifs” that are bound to occur at some point. If your own plan (or lack thereof) consists mostly or entirely around the equity in your home, it may be time to diversify.