By Anita Bruinsma, CFA, Clarity Personal Finance
Special to the Financial Independence Hub
“Your home should not be your retirement.”
This is a common headline in personal finance and although the details are nuanced, the headline can give the wrong impression: that you shouldn’t rely on the equity in your home to fund your retirement.
Certainly, it shouldn’t be the only source of retirement income: homeowners also have to save using RRSPs and TFSAs. However, homeowners in high-priced housing markets will likely have excess equity in their homes that should be considered when building a retirement plan and determining how much they need to save.
The rationale for the “don’t rely on your home for retirement” advice is twofold: first, that you will always need a place to live and the value of your home will be needed to buy or rent another residence; and second, that you need money to buy food and other things, which you can’t do if all your wealth is tied up in your home.
Both these points are valid, but they don’t apply to everyone. Like all aspects of financial planning, each individual’s personal circumstances need to be considered and in fact, many people should count on their home to help fund their retirement.
You’ll always need a place to live
To address the first point — that your current home will fund your next home — consider doing an analysis that looks at the cost of renting for the years after you sell your home. For those in high-priced housing markets like Toronto, the proceeds from selling a mortgage-free home will likely more than offset the cost of renting for 30 years in retirement, including paying for long-term care. The same analysis applies to downsizing by buying a smaller place in a less-expensive market. This means there could very well be excess funds that can be used later in life and this should be accounted for when determining how much retirement savings you need.
Supplementing retirement income
What about the second point, that you need cash to fund your expenses? To address this problem, using a home equity line of credit (HELOC) is a viable option. For those who want to retire or semi-retire but don’t want to sell their home right away, a HELOC can be used to supplement retirement income.
A HELOC is a very flexible and convenient product. It allows you to borrow money any time you want and repay it when you want. You do have to make at least interest-only payments every month, but other than that, the limitations are few. It’s also very easy to access, as you can transfer funds back and forth between the line of credit and your chequing account online.
What about the adage that you shouldn’t carry debt into retirement? Being debt-free is always a nice thing, especially to be free of credit-card debt. However, borrowing from your HELOC knowing that you will easily be able to repay it when you sell your house is very different, as long as you are borrowing and spending responsibly. To see an example of how a retiree might use a HELOC, have a look at this blog post on my Clarity Personal Finance blog.
Using credit should never be taken lightly and there are risks with using a HELOC. What could derail this strategy? The value of your home plunging (making your loan equal to the value of the house), interest rates skyrocketing and staying there for a long period of time (making interest costs too high), or the bank calling the HELOC early (if you are persistently delinquent on the loan).
Enjoying what you’ve earned
What if you choose to be overly-conservative and ignore how you can use your home equity in retirement? A few things might happen: you may end up working longer than you need to and/or you might deprive yourself of a better lifestyle in retirement. And you could end up leaving a large amount of equity (the value of your house) in your estate. Is that what you want to do? If so, make it a conscious choice, not a side-effect of being tied to the idea that you shouldn’t access the equity in your house.
Don’t ignore the contribution that your home can make to your retirement. You could be short-changing yourself.
Anita Bruinsma, CFA, has 25 years of experience in the financial industry. As a long-time investor, Anita is passionate about demystifying investing to make is accessible to more people. After a long and satisfying career in the world of banking and wealth management, including 15 years managing mutual funds with a Canadian bank, Anita started Clarity Personal Finance, and now helps people learn to better manage their finances, including how to invest for themselves.