Home Equity Enough to Fund Retirement?

We have learned that Canadians are wealthier today in large part because of the equity in their homes. Will that be enough to supplement retirement needs after downsizing to a small place? Let’s put some numbers to it to find out.

First, how much funding can be expected from public sources? Full CPP and OAS today could be approximately $1500 per month per spouse. Let’s assume that the couple is receiving $3000 per month from these sources or $36,000 per year. 

How much can home equity contribute to this in retirement? Could it be as high as $10,000 in investment income annually once the home is sold; to bring income up to about $46,000? 

Using a dividend rate of 4%, would mean that the capital value would be $250,000. This suggests to me that the family would need to sell their $500,000 home and then purchase a new home for only $250,000. 

Or they would sell their $750,000 home and buy a $500,000 condo. Perhaps this last scenario is possible, but it would only be realistic for a small portion of the population.

Do a reality check. If you are fortunate enough to end up with some money left over after your home sale and a downsize, how much investment income can be generated with your reinvested capital to be used for wants and needs? 

My experience with clients suggests that there may not be enough money to provide any additional or meaningful amount of income whatsoever, at least not without significant thought and planning well before transactions take place.

So please don’t count on it . . .count on a proper retirement planning process, which includes tax efficient investment and withdrawal strategies to maximize all capital available in retirement.

This guest column was submitted by Doug Nelson, author of the newly released 3^rd edition of Master Your Retirement, published by Knowledge Bureau.