How Does Your House Factor Into Your Retirement?

I often have people tell me that they think of their home as an asset to consider as part of their retirement planning…which always gives me pause.

Yes, it is an asset, but how is that going to ensure you have enough money to get by when you stop working? You still need a place to live, right? I know there are things like reverse mortgages or you can sell for a profit and downsize…but you should understand all your options before you make any moves that might lead to not-so-optimal results.

In this podcast, I’m talking about why people shouldn’t necessarily think of the houses they live in as investments to factor into their retirement.

Show Notes:

Hello, and welcome back to another round of, “Our Heart of Money Talks”. This is episode 13, and I want to talk about your house and share my take on your home value and how it works into your financial picture. In reality, an asset is only something that puts money in your pocket.

We call our houses assets, but really we truly need a roof over our heads. So when we call the house an asset, it is only on paper as part of our net worth. It’s not like a gingerbread house that we can just break off a piece and eat as we need to. It’s only after a mortgage is paid off and the bank doesn’t have their greedy little hands on it anymore that it is an asset.

Then we can think of a house that we live in as a possible asset to use later down the road if we need it. Here’s a common question I get asked.

“Should I include my house in my retirement plan?”

In general, financial planners don’t count the equity in your home when constructing a retirement income plan and that’s because you need a place to live.

So financial planners count it as a personal asset, even though it’s a large part of your net worth it’s something that doesn’t play a part in giving you extra retirement income. So you won’t actually see it in income planning. Our goal is to have our home paid off because it’ll free up cash flow in retirement.

It gives you some options and flexibility that will work in your favour down the road. I recommend that you leave the value of the home out of your retirement planning, at least for right now. Just keep it for a much, much later option that might come up. I’m going to share some of those options with you.

In this podcast today, I’m talking about why people shouldn’t think of the houses they live in as investments. Doing that can fog up thinking and lead to decisions that are just not optimal. It means that other savings might not happen. We might think, “Okay, I can afford this home. And really I’m going to think of it as an investment in an asset. Then I don’t have to save any extra money for my RSP or tax-free savings.”

And so that’s when those decisions just are not optimal, you should buy a house because you and your family enjoy living in it. The schools are great. You enjoy the community aspect of it, but not so much as an investment.

That’s not to say there are no upsides and benefits to having a house. Increases in value or even just maintain its value…a house can offer some fantastic things like not paying tax on the appreciation. If it is your primary residence, you can also rent out an extra room or basement for some extra cash.

And of course, the house is something you own as opposed to paying the same amount every month to rent a place and walk away after, let’s say 10 years empty-handed. Just be careful about expecting your home to make you money over the long-term purely by virtue of it being a house.

Okay. So here are some of the options that I was going to talk to you about.

Some options that might play out later in retirement that you could consider with your house. Number one downsize and invest the remaining funds. You can sell your home and purchase a smaller, less expensive house or condo in the same area.

Number two, you could sell your place and move to a cheaper location.

So for example, I know some RCMP members that take postings in another province. One of the perks is that when they sell their house here in our province that has a higher house value and then move to a province that has cheaper housing. They can bank some money. An example of that right now is one of my clients who is moving to the East coast.

In fact, I think he even saw some commercials on social media. “Hey, come on out to the East coast…work from home, remotely and live cheap”.

So that’s one way.

The third is to take out a reverse mortgage and the fourth is the option of home equity. Credit for those last two options are very similar.

A reverse mortgage could be used as a wealth strategy, and that means that debt could be used to try and help a financial situation. You’ve seen the commercials on TV, those reverse mortgage companies. I don’t know very much about those companies, but they make it sound wonderful and easy. But I’m sure there’s some fine print.

It might be a little bit exploitive to try and convince someone saying,” Yeah, just go in debt and let’s set up this reverse mortgage part without any payments back.”

I don’t know much about those companies, but I do know their strategies. The wealth professionals, certified financial planners can help with using the equity in the home that doesn’t require monthly debt repayments.

They use the equity in the home as a strategy of accessing the house as an asset. This is when you’re actually now going to turn it on as an asset. You can imagine in big cities, the home values, think Vancouver, Toronto, houses are selling for $1,000,000 and $2,000,000, That is a large asset that might have to be used in retirement planning.

So the home can provide options and flexibility later in life. That flexibility could be treating it like long-term care. This is access to money. If you want to stay in the home, you can afford to bring in care over time by accessing some equity, you can draw out equity to purchase more real estate to provide income.

I’ve seen that, or you can purchase an investment product that pays a monthly income over time. These are all options. Now, they require expert planning and consultation because it comes with risk, right? You’re borrowing money, essentially. You’re using your house as collateral to top up income or lifestyle.

So it can’t be taken lightly and it should be well investigated. Timing is everything here as well. You don’t want to max everything out and be young.

So here’s a question that came in from a listener.

“We are planning to retire in a couple of years, I’m 60 and my wife is 58 and want to downsize our house. We estimate our house to be worth about $700,000. We don’t have a mortgage as we paid off our home several years ago. We are wondering if it’s better to sell our large home and purchase a smaller house now, or to sell the house and just rent a place for the next 20 years or so. We anticipate that the smaller house would cost us about 400,000.

Would we be better off renting or simply investing this money? What do you suggest?”

Okay. So here’s my answer. With real estate prices so high in much of Canada, cashing out by selling your home and renting can certainly look like an attractive option right now. But renting so early in your retirement when you’re 58 and 60, you got a long time to go. So it could be premature since it would mean that you’d be renting for possibly 25 to 30 years or more. An option you might want to consider staying invested to some degree in the real estate market for maybe 15 years and you can do that by downsizing to a smaller house or a condo.

You can then reconsider the renting scenario at a later stage in your retirement, perhaps when you’re 80 or 85 years old. The equity, having your downsized home at that time can become a source of income for this later stage in life. When you may need long-term care, you can think of the home equity from the downsized home as a kind of long-term care insurance that will be there when the house is sold.

You’ll be really happy you have it. My grandpa sold their house and used the proceeds to move into an all-inclusive retirement luxury apartment. It was beautiful. I called that the love boat because you’d walk in and there’s this huge grand fireplace. Someone had a cute, poodle and it was always sitting on the couch…and of course, it was bedazzled.

It was fantastic and really cozy. They had a sense of community there as well. You’d have friends and you come down to the dinner wearing your clothes and dressed up for supper. The cost here in the city, I think it was around about $4,000 a month. I’m not sure exactly, but the all-inclusive package.

So the house sale covered that. It gives you the option, having one foot in real estate still.

So let’s do a little math. If you sold the house and invested $700,000 and received a 4% rate of return, with an estimated $20,000 annual return to start.

That might not be enough to cover rent increases. You will want the investment to also generate enough income to enjoy other activities as well. For the next 25 years, this investment might also generate some additional interest or capital gains income in a non-registered portfolio. So I’m always thinking of tax consequences and that would need to be looked at.

You would need to factor in all of your other sources of income. Once you have a good understanding of what your total income will be, then you can make a better choice as to whether to rent or downsize. So for instance, if you have ample savings, investments and pension income coming in at retirement, then downsizing to a smaller house or condo and keeping that one foot in the real estate market is a strong consideration.

I recommend that…buying a smaller home for cash and having $250,000 or so from the sale of your larger home available for investment. It’ll give you a cash cushion if you need it, and it could give you fun money or it could be that cash reserve. If things get a little bit tight, it gives options.

In the scenario presented where your $700,000 home buys a smaller one for $400,000, you can invest, let’s say $250,000. Of course, I’ve taken off real estate commission and other closing costs, so I just rounded to having $250,000 that you can then invest in a well-diversified portfolio, yielding 4% annually. So expect about, just an estimate here, but about $10,000 a year in investment income during your retirement years.

That can be helpful and it could help you enjoy a few extra things. So the key to making the right choice for you is to look at your finances in the context of what type of lifestyle you’d like to have in retirement and plan your finances for that retirement. Based on the lifestyle you hope to have, you’ll have a stronger financial plan and a happier retirement.

If you’d link or match your retirement spending to specific goals and activities you want that way, there are no surprises that require spending beyond your means. So that’s my answer. Thank you for sending in the question. I love those. I hope it was helpful.

I guess my takeaway for you listeners today is to not make your house your retirement plan.

You can leave it out as something that gives you a future option. Similar to the question I just answered for this couple, you’ll always need a roof over your head. And it’s best to not count the house you live in as a piece of your retirement plan that you can just bite off and spend. Save that for an option later in life as things unfold.

That’s it for today. Please send me more questions at [email protected]. I’d love to answer and help any way I can, so send me a note, take care. Talk soon.