Is Home Ownership Actually a Hindrance in Retirement?

House Ball and Chain
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Owning a home while retired

It’s a debate full of unpredictable variables: is it best to maintain home ownership and rely on equity to generate income after retirement; or to sell your home, invest the proceeds, rent and live off the dividends?

The answer becomes very reliant on two factors that are not in one’s control: investment return and real estate appreciation. Suppose Mr. and Mrs. Smith opt to sell their home for $400,000. They invest $300,000 and earn an eight per cent return annually, or $32,000 per year. They move into a retirement villa that costs $1,600 per month in rent, inclusive of heat, utilities, and yard maintenance/snow removal. Their living expenses now equate $19,200 annually. Their investment income more than covers this cost, so they never have to access their investment capital, and can leave it in trust to their family members.

That is an ideal situation. Now suppose their investment return slumps, and provides only a three per cent return annually, or $9,000 per year. They will now have to access their capital to cover living costs, and since their capital will be reducing, so too will their returns.

Now let’s say that the Smiths keep their home. This route could go one of two ways: their property continues to appreciate and they generate income by accessing their rising equity, tax-free, through a reverse mortgage; or their property decreases in value, they max out their equity takeout, and at the time of their passing the home’s value upon sale does not cover the sum they’ve borrowed against it. Their descendants are left with debt.

Ultimately, the decision comes down to priorities, timing and location. If the pride of home-ownership, having a large yard and rooms to home family and guests on holidays, is of paramount importance to one’s retirement objectives, selling and renting a smaller space may not be an option. Alternately, if living in a rental community that organizes social activities, maintains the property for you and is located in a central place, convenient from which to access needed amenities, is more appealing, selling may be the best course of action.

If the idea of needing to move while renting daunts you, there are retirement complexes in some Canadian cities that offer lifetime renter guarantees, meaning, the unit is yours as long as you want it.

Upon retirement, examine the directions you can take thoroughly, and discuss them with your financial planner.

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