Master Your Retirement: Is Home Equity The Key? Don’t Count On It!

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

I read with interest on February 19, that twenty-four per cent of the respondents to Sun Life Financial’s annual “unretirement” survey said they agree with the statement, “My residential real estate will serve as my primary source of retirement income.” 

I am baffled by this for I have never seen one retirement planning situation where there was enough home equity to partially fund any retirement income. There are many situations where one could sell a vacation property, such as a condo in the south or a cottage at the lake, and then use the proceeds to generate income, but I have never seen this happen with a principal residence.

Why is this? Typically, when a retired couple or individual is “downsizing”, they are moving from an older home, one that they may have lived in for 20 to 30 years. This home is definitely worth less than a similar sized new home. 

Now the question is: what is this couple moving into next? Are they moving into a smaller home that was built around the same time as their first home, or are they moving into a smaller home or condo that is of a newer vintage?

The typical answer is that they are moving into a condo or smaller home, but of a newer vintage. The only problem with this is that this new home may not be that much less expensive than the one that they are selling. In some cases, I have seen people “downsize” yet still end up with a mortgage. Further, condo fees, like property taxes, are often an uncontrolled cost.

It seems reasonable to assume that if you could sell your family home after 20+ years that you could move to another community, perhaps further outside of the city, and pay much less. While this may be true in some circumstances, you are also moving away from the community, friends and family members who may already live close by. 

Many people wish to move closer to family, friends, children and grandchildren, which then may mean that you end up spending more money on your “smaller retirement home” than what you had originally expected. The result? Little is left for investment purposes. 

The “unretirement” survey went on to say that “on average” Canadian’s expected to have 10% of their income coming from the equity in their home. Being a financial guy, I was curious to put some dollars around this notion.  What did I find out? Tune in next time!

NEXT TIME:  Home Equity Enough to Fund Retirement?

A certified Financial Planner (CFP), Chartered Life Underwriter (CLU), Master Financial Advisor (MFA), and Canadian Investment Manager (CIM), Doug is a 21 year veteran of the financial services industry in Canada and is the second generation owner of Nelson Financial Consultants in Winnipeg. He is a senior financial planner and licensed portfolio manager. Doug authored several advanced financial planning courses with the Knowledge Bureau from 2003 through 2012, is a highly regarded, thought-provoking industry speaker and has been quoted repeatedly in many local and national media including the Business News Network.