This is going to be controversial. However, my intention isn’t to capsize your retirement plans, rather, I’m just rocking the boat to see where your feet will fall.
Most Canadians are homeowners
To preface my theory, in 2018, approximately 68% of Canadians owned their home and this number rose to over 70% for Canadians aged 65 and older, according to Statistics Canada.
The data is clear, Canadians love owning their own home and we all know why. Right?
I’ll answer the question by talking about my own real estate journey.
Toronto real estate has been a great investment
My late wife and I bought our first property 35 years ago. A three-bedroom condo in the Eglinton and Royal York area, and we paid $109,000. Fast-forward four years and we sold it for $199,000.
As a financial advisor, I couldn’t believe how much we’d made in just four short years. We quickly become firm believers in Toronto real estate as a profitable investment.
Our second home was not as profitable. We bought the house in 1990 for $450,000 and after 16 years, sold it for $660,000. A gain of approximately 3% per annum (simple interest).
Fortunately, my current property has been a home run, bought in 2006 for $925,000 it is now worth considerably more.
I can happily say my 35-year homeownership journey achieved its objective of increasing my net worth.
Maybe I could have achieved the same or better with an alternative investment portfolio, but I suspect my objective of buying a home is the same for most Canadians: increase net worth and provide a roof over their family’s heads.
Should retirement goals be based on capital appreciation or cash?
If Canadians are buying homes to increase their net worth, then, it is logical to assume our homes will one day fund all (or part) of our retirement needs Right?
For me, the answer is “yes”. My homes have always been part of my retirement plan. Soon, I plan to sell my current home and use the proceeds to fund my retirement. I know this is a controversial conclusion, but in retirement, my goal is no longer capital appreciation/accumulation but income needs.
The equity in my home will provide cash to fund my retirement lifestyle. Because, in retirement, my needs are different. I’m not interested in capital appreciation; I’m interested in cold stone cash.
Math and emotions
- According to a 2019 Sun Life Financial survey, nearly half (47%) of working Canadians believe there is a serious risk they could outlive their retirement savings.
- 44% of working Canadians expect to be employed full-time at the age of 66.
- Nearly a quarter (23%) of Canadian retirees describe their lifestyle as ‘frugal’.
Here’s the contradiction, most retirees own their home, yet almost half of Canadians (see above) feel they don’t have enough retirement savings.
It doesn’t make sense to own a paid-off home and live frugally. Yet, most retirees don’t consider their homes as retirement assets and have resorted to a life of frugality.
I think this is an emotional issue, rather than a mathematical one, because retirees may feel emotionally attached to their homes, which is preventing them from using the equity.
Let me explain:
Bob and Jane, both 65 years old, own a paid-off home in the GTA worth $1.2M and decide to sell the property and rent. The house proceeds will be reinvested in a basket of individual stocks.
Let’s assume an investment return of 4%, inflation of 2%, and a retirement lasting 30 years.
Given the above assumptions, the proceeds from the house will generate an inflation-adjusted annual income of roughly $50,000. That’s $50,000 every year for the next 30 years.
I have ignored tax implications because the payments would be a blend of capital repayment and capital appreciation, hence the cash flow will be very tax efficient.
Let’s be honest, a $1M+ homes are quite common in GTA so why not sell the home and live well in retirement? The extra cash would surely help improve any retirement lifestyle. Renters will face monthly rental payments, but a lack of housing expenses certainly offsets these costs.
Many Canadians wish to leave the home to their children
However, we can’t ignore the emotional aspect here. We’re all human, right? From my experience, many clients are reluctant to sell their homes because it may mean their children receive a smaller inheritance.
But I’m sure that if we asked your children, “would you prefer that your parents spend their inheritance or save it?” most kids would say “spend spend spend!”
Please don’t get me wrong, I don’t plan to squander my net worth by spending frivolously, but on the other hand, I don’t plan to live frugally either.
The principle of selling your principal residence
I’m sure that inheritance is still niggling at the back of your mind, and estate planning, is certainly an essential part of your retirement success. But remember, I’m recommending that you look into selling your principal residence not that cottage by the lake or your Miami condo. So instead of sharing cash with your children, why not arrange your estate to share the lake house instead?
Final thoughts,
I think that all retirees should investigate whether selling their homes and using the equity to improve their retirement lifestyle, makes sense to them and their wallets. Why not make an appointment today and Contact us.
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