Planning to cash in on your home to help fund retirement? Here’s how to do it right

It’s a common question financial advisers get asked: Should I cash in my property to help support my financial needs in retirement?

Experts say it all depends on how much you spend and how much you have saved.

“It’s a very common question and one I’m seeing daily in my practice,” said Ian Calvert, vice-president and principal of wealth planning, at HighView Financial Group.

It’s a question that’s been percolating in the minds of Elizabeth, 58, and Charles, 60, who are looking to retire in a few years time. (We’re just using first names so they can provide detailed financial information.)

The couple have lived in Toronto for more than 30 years, and bought their three-bedroom, semi-detached home in the Davisville area in 2005 for $620,000.

Now, similar homes in their neighbourhood are selling for up to $1.3 million.

“We think we’re sitting on a good vehicle to ease into retirement,” Charles said.

Charles isn’t wrong, because selling a home that has appreciated greatly in value can be a significant financial asset for retirement cash flow, Calvert said.

“Selling a home shouldn’t be viewed as a negative event,” he added.

For many Canadians, a home is their biggest asset and it can yield “unbelievable returns over the long run,” and the transaction (when selling) is tax-free, if it’s their principal residence, Calvert noted.

“It’s a big tax-free asset that can help people in retirement, especially if it’s invested in a well-managed portfolio.”

However, Charles and Elizabeth don’t need to sell the property right away.

They have more than $800,000 in their registered retirement savings plan (RRSP), plus $232,000 in additional savings from tax-free savings accounts and investments. The couple does not have a private pension plan but will have access to the Canadian Pension Plan and Old Age Security when they turn 65.

The couple spends on average $3,500 a month in house maintenance, food, entertainment, phone bills, and utilities. But they also want to be able to travel in retirement and possibly spend prolonged periods of time abroad.

“What really matters when planning for your retirement years is figuring out what lifestyle you want,” said Elke Rubach, CEO of Rubach Wealth, a financial planning service. “The last thing you want is to need a job at the tender age of 92.”

Because Charles and Elizabeth want to travel and spend longer periods of time overseas, the associated expenses add up, when calculating for accommodation, meals, entertainment and air fare.

“You could easily spend $10,000 on (a) trip, so that needs to be factored in,” Rubach said.

Renting would also add another $3,000 to $4,000 a month, and to find more affordable rent would take the couple further out of the city. If it’s important to stay in Toronto, or the same neighbourhood, it will contribute to higher expenses, Rubach said.

Renting out the primary residence to support the rent on a downsized rental for the couple is a possibility and offers more cash-flow in retirement, she added.

It’s important for the couple to be discerning in the type of rental they choose to downsize to, because a condo rental comes with exorbitant fees, said Janet Gray, financial planner at Money Coaches Canada.

“A purpose-built rental (such as a unit in a lowrise or townhouse) is a better option, and you’ll get more bang for your buck outside of the city,” she said.

There are costs associated with selling a home, such as the real estate commission and legal fees, as well as moving costs and utility fees for first-time use, which can result in thousands of dollars being spent, Gray said.

But she firmly believes that those looking to retire and sell their home should try a different lifestyle and neighbourhood. “It doesn’t mean you have to rent forever; try it out for a few years, and, if you don’t like it, you can always buy a smaller apartment down the line.”

If Elizabeth and Charles decide to sell their home, it will provide the couple with enough money to downsize and buy a small unit if they decide renting isn’t for them, Gray said. Because the couple loves to travel, home ownership could become burdensome, with the constant repairs and renovations needed, especially for older homes.

Elizabeth said the home needs repair work and, at this point in her life, she is “fed up” with the requirements of home ownership. Plus, with their daughter studying abroad in the United Kingdom and likely to stay for some time after graduation, the home is feeling too spacious.

“The couple is in a decent starting position to live off their savings first,” said HighView Financial’s Calvert.

Before deciding to sell the home, the couple needs to go to a financial adviser and create a comprehensive financial plan, which maps out how much the couple intends to spend and if it aligns with their savings.

An expense the couple hasn’t factored in is the cost of health-care as they age. This needs to be accounted for as it could become a primary expense later on, he added.

“They really need to crunch the numbers and ask, ‘How much will I need?’ and ‘What’s the longevity of my savings?’ From there decide if it’s best to sell the home and downsize,” Calvert said.