Many Canadians entering retirement find themselves with a significant portion of their net worth tied into their principal residence. Home ownership in many ways is the national symbol of success. Most clearly remember the first home they purchased, and it's hard forget the years of forced savings to pay down the mortgage.
So it might seem a bit ridiculous now that the house is fully paid off, and you finally have time to enjoy it, for someone to suggest that you sell it.
But for some, this is the only way they can ensure a comfortable retirement. In first getting to know our clients we ask for a net worth statement that lists all assets and liabilities. The challenge we are seeing is that homes represent 50 to 80 per cent or more of their net worth.
When preparing a financial plan for clients with more than fifty per cent of equity in liquid assets, mapping out three scenarios helps illustrate options.
- Scenario 1: Sell the house early in retirement to provide for additional capital to fund all retirement years. This may be the best scenario if you are among the many house-rich and cash-poor retirees.
- Scenario 2: Sell the house part-way through retirement. This scenario is what typically unfolds for most people as a way to fund an assisted living arrangement.
- Scenario 3: Don't sell the house. There is a cost to continuing to own your home throughout retirement. If you have sufficient other liquid assets then this scenario can certainly work.
We have listed the five most common obstacles we encounter when Scenario 1 or 2 is the solution to a comfortable retirement.
1. Psychological Component: It has been ingrained in us that being a home owner is a symbol of success. Renting has a stigma that is associated with the lack of success.
2. Emotional Component: Selling the home in which you raised a family can be a tough emotional decision.
3. Needing Space: Many who have enjoyed having space to garden may wince at the idea of living in a condo or townhouse. This obstacle is relatively easy to overcome as people have the option to rent a place with characteristics similar to what they previously owned.
4. Loss of Control: When renting, there is the potential that the landlord sells your home or applies restraints on modifications. Spending the time to find the right place, and to negotiate a long term lease, should reduce this risk.
5. Lack of Knowledge to Invest Proceeds: In some cases, the first time people have invested serious amounts of capital is after they have sold their home during retirement. It can be a daunting feeling to self manage the proceeds from a house sale. Seeking professional help at this stage is important to ensure the proceeds are set up in a way to both protect your capital and generate the cash flow you require.
For those considering Scenario 1 or 2, I have listed ten benefits to selling your home:
1. Relocating to Cheaper Area: Many of our clients have sold homes in higher cost communities and have chosen to move to lower cost areas within Canada.
This also includes clients of ours who have retired to less expensive countries outside of Canada.
2. Timing of Selling Home: The best part of selling your home in Scenario 1 and 2 is that you can control the timing of when the house sold. If you treat your house as an investment, then you will be able to maximize the value. There is a distinct difference between wanting to sell at the right time and having to sell as part of an estate.
3. Access to Non-Registered Funds: Gains from selling your home are tax free and the proceeds can be used to open up a nonregistered investment account. These funds can then be accessed with no tax consequence. This is distinctly different then RRSP and RRIF funds that are fully taxable if pulled out. When you have investment funds in both registered and non-registered accounts, you are able to smooth out your income during retirement and still meet your cash flow needs.
4. Having Funds When You Need them: Early on in retirement is when you would typically require the most capital to fund your cash flow. The early retirement years is the period that I define as the time "when you want to do things" and "while you can do things." Later, you may have a medical condition that prevents you from doing the things you want to do. Some people simply lose interest as they age.
5. Budgeting is More Certain: Knowing what your monthly rent is provides peace of mind from a budgeting standpoint. With home ownership you have to plan for potential replacement of appliances, new roof, and other repairs and maintenance. These are in addition to annual required large payments such as property taxes.
6. Matching Lifestyle: As you enter retirement you may not have the desire to deal with such a large home or yard. The next phase of your life may involve less maintenance and flexibility, such as the ability to lock the door and travel for a month.
7. Increased Flexibility: When significant assets are sold during retirement you have more control over your net worth. You can choose to gift assets early to family members. I've seen situations where clients want to help children buy a home, pay down a mortgage, set up a TFSA for yourself and each adult child, or set up an RESP for each grandchild.
8. Downsizing: Some may also look at the option of selling their large prime real estate property and purchasing a smaller home. With real estate fees, legal costs, and property purchase tax this may not net out as much as some people first believe. Stepping back to see why you are downsizing is the key. The purpose of downsizing may be to have access to your net worth and to have a lower maintenance home.
9. Charitable Giving: Planned giving prior to death has many benefits. Donations provided during your lifetime often have a far greater tax benefit then a large lump sum amount provided for in your estate. In addition to tax benefits, you have the ability to better control the donation while you are alive.
10. Estate Planning is Easier: We have clients who have more than one child and would also like to leave the family home to the children. The practicality of this is normally not realistic. In the majority of cases I have seen the house put up for sale and the proceeds divided amongst the beneficiaries. The executor has the duty to secure the home and deal with the property.
The house is subject to probate fees, and is exposed to a forced sale at potentially the wrong time in the real estate market cycle.
Kevin Greenard CA FMA CFP CIM is an associate portfolio manager with The Greenard Group at ScotiaMcLeod in Victoria. His column appears every second week. Call 250-389-2138.
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