Unlocking the equity in your home can support your retirement

It turns out that this business of, “Oh, when I retire I’ll only spend half of what I spend today,” doesn’t actually happen.

According to the stats — as well as first-hand experience working with soon-to-retire folks — spending only nudges down about 10 to 15 per cent in retirement years relative to one’s working years. The way money gets spent, however, shifts toward travel, medical expenses, grandkids and, these days, much higher costs at the grocery store and at the pump.

So, if your total retirement income from your monthly pension payments, investments (RRIF, for example) and other sources of income (rental properties or side hustles) isn’t at 90 per cent of your pre-retirement income, you may be underprepared.

There are obviously outlier cases here, such as the retiree making a drastic set of changes to reduce their lifestyle and budget. But if you’re reading this and feeling anxious about your retirement income streams not being sufficient, take 10 deep breaths, because there’s another option to shore up your retirement nest egg.

Downsize your home to unlock the equity from your primary residence.

For obvious reasons, this would only apply if you are a homeowner with a low-to-no mortgage.

Indeed, the real estate market is quite rocky right now, so hang tight on putting the “for sale” sign up. Your first step is to fully assess how ready you are for retirement (hire a professional) and what your needs are for a downsized home. Then you can work on the right timing for your needs.

Get clear about your potential net payout

A good place to start when exploring downsizing is to get an assessment of the property’s value. This is best done through a realtor that you trust, but you can also look at comparable listings on Realtor.ca. With a valuation in front of you, deduct any transaction fees (lawyers, taxes and realtor commissions) as well as lingering mortgage and home equity line of credit (HELOC) balances. If you owe money for consumer purchases — credit card balances, regular lines of credit or car loans — deduct those, too. Having consumer debt in retirement is not a good idea and you’ll want to clear this up, especially as interest rates are climbing.

Your expected net payout is the number that’s left over.

Do the math with your financial planner before you transact

The payout is what you’ll have to play with for both a downsized home purchase and to beef up your retirement nest egg; which is the goal! That nest egg will be an important source of income in yourgolden years.

For context, with every $250,000 you add to your retirement nest egg, and that is invested in a fixed-income-based portfolio producing a 4.75 per cent annual rate of return, the monthly income stream is just shy of $1,000.

Here’s how to loosely calculate your potential investment income: Multiply the investment value by the yield to get the amount of annual income. Continuing with the example above, if your incremental investment from the downsize is $250,000 and yields 4.75 per cent, your investment income will be approximately $11,875 a year. Note that this doesn’t include dipping into the capital; it’s just the income.

Now, work with your financial adviser to create a crystal clear picture of all of your retirement income sources, including CPP and OAS.

If your total monthly retirement income is in a desperate place,you’ll naturally want to bank more of your equity from the downsize toward your nest egg, and buy or rent a much less expensive place to live — it is a downsize, after all.

The downsized home

Unfortunately, I’ve seen it happen where the retiree ends up not really doing a downsize, financially speaking. To make the downsize strategy make sense, you’ll want to scale back the purchase in a meaningful way so that you can put a good chunk of your equity to work — hundreds of thousands of dollars.

You’ll also want to research the prices and locations of downsized homes that interest you. What’s going to make you happy and serve your retirement needs?

The downsize strategy has other benefits, too: a smaller home (typically the common outcome of a downsize) results in lower utility bills, fewer “things” to manage, is easier to maintain, and can be less stressful. Some retirees even choose to rent so they don’t have to manage their own property, and this can work, too. There’s going to be an adjustment period, but embracing the change could be great for your nest egg.

Certainly there are other options to scoop equity from your primary residence, to support your retirement living costs; refinancing, or a reverse mortgage, or a HELOC. But those solutions are forms of debt, which in the vast majority of cases you’re best to get rid of, permanently, in retirement years.

This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.