Unlocking Home Equity: Could Your House Help Fund Your Retirement?
In Episode 18 of Retirement IQ – Unlocking Home Equity: How Downsizing Can Transform Your Retirement, Wayne Clements and I explore the financial and practical side of downsizing and how your home equity could become another tool for funding your retirement...
For many Canadians approaching retirement, their home is one of the largest assets they own.
In fact, after decades of mortgage payments and rising real estate values, it’s not unusual for someone to reach retirement with a significant portion of their net worth tied up in their house.
The problem?
You can’t spend your house.
You may own a $1.5 million or $2 million home, but unless you do something with that equity, it doesn’t help pay for travel, hobbies, helping your children or simply enjoying a better retirement lifestyle.
In a recent episode of the Retirement IQ podcast, I sat down with real estate broker Wayne Clements of Bolton & Clements Real Estate Group to talk about something I think deserves much more attention in retirement planning:
Should your home be part of your retirement income strategy?
The House-Rich, Cash-Flow-Poor Retirement
One of the situations I regularly see is someone who has done almost everything right.
They’ve paid off their mortgage. They’ve accumulated RRSPs and TFSAs. They have CPP, OAS and perhaps a company pension coming.
And they own a valuable home.
On paper, they may be worth several million dollars.
But that doesn't necessarily mean they have the cash flow to live the retirement they want.
A substantial amount of their wealth may be locked inside their home.
That creates an interesting question: What is all that equity ultimately for?
There isn't one correct answer. Some people want to remain in their family home for as long as possible. Others want to leave the property to their children. And for some, the home is an asset they have always expected to use eventually.
But it's a decision worth thinking about before retirement rather than waiting until circumstances make the decision for you.
What Could Downsizing Actually Do?
Suppose you sold a larger family home and purchased something smaller, freeing up $500,000 of equity.
That's not simply $500,000 sitting in an investment account.
It's potentially another source of retirement income.
For illustration, $500,000 represents approximately $1,000 per week for almost 10 years, even before considering any investment return.
Think about what an additional $1,000 a week could mean during the years when you're healthy and most able to enjoy it.
It might mean travelling more often, spending winters somewhere warm, helping children or grandchildren, pursuing hobbies, or simply having considerably more breathing room in your monthly budget.
The objective isn't necessarily to leave retirement with the biggest house or the largest investment account.
The objective is to use the resources you've accumulated to create the retirement lifestyle you actually want.
Downsizing Isn't Just a Financial Decision
Of course, deciding to sell the family home isn't as simple as running the numbers.
Wayne and I discussed some of the practical and emotional issues that come with downsizing.
Where will you move? What kind of home do you want next? How much space do you really need? What will the new home cost? What are the transaction and moving costs? And perhaps most importantly, are you actually ready to leave the home where you've spent a significant part of your life?
These questions matter.
That's why I don't think people should automatically sell their home when they retire.
Instead, your home should be considered alongside your RRSPs, TFSAs, pensions and other assets when you're building your retirement plan.
Your Home Is Part of Your Retirement Plan
For decades, we've been taught to pay down our mortgages and build equity in our homes.
That's generally been very good advice.
But when you reach retirement, the question changes.
It isn't simply:
"How much is my house worth?"
A better question may be:
"How can the wealth I've accumulated in my home help me live the retirement I want?"
For some people, the answer will be to stay exactly where they are.
For others, downsizing could unlock hundreds of thousands of dollars that can dramatically change their retirement cash flow.
The important thing is to make that decision intentionally — and to understand how it fits into your overall retirement income plan.
In Episode 18 of Retirement IQ – Unlocking Home Equity: How Downsizing Can Transform Your Retirement, Wayne Clements and I explore the financial and practical side of downsizing and how your home equity could become another tool for funding your retirement.
Watch or Listen to the full conversation here and decide whether your home might be doing more for your retirement.