Many retirees want to know how much they can spend in retirement without running out of money. The caveat is that most also want to remain in their home as long as possible. With the pandemic shining a light on poor conditions and service at long-term care facilities, it’s likely we’ll see even more seniors wanting to ‘age in place’.
What that means for some retired homeowners is coming up with a way to tap into their home equity. The most common thought is to downsize – sell the family home and move into a condo or smaller house while pocketing the difference in price. Another option is to sell the home and rent in retirement.
Those who want to remain in their home for comfort, sentiment, or other reasons may choose to utilize a home equity line of credit. One challenge with this approach is getting a large enough loan in place while you still qualify (i.e. before you retire). Another challenge is that tapping into the loan triggers monthly interest payments.
Finally, there’s one option that was once considered taboo but is now becoming increasingly popular: a reverse mortgage. Canadian homeowners aged 55+ can set up a reverse mortgage through one of two lenders, Equitable Bank and HomeEquity Bank.
The reverse mortgage allows you to access up to 55% of the value of your home. The cash can be paid over a longer period of time (literally like a reverse mortgage), or in a lump sum up front.
The money is tax-free. You maintain ownership and control of your home, and only pay back the loan when you move or sell. Any appreciation in value over time still belongs to you. You’re simply required to keep the property maintained, pay your property taxes, and keep the house insured.
In areas of the country like Vancouver and Toronto, many seniors will find that their home is by far their largest asset. If the idea is to age in place and leave the home in your estate, you may be sacrificing your own retirement lifestyle along the way.
Imagine you live to age 95. How old will your beneficiaries be and how useful will an inheritance of several million dollars be to them at that time?
Then there’s the reality that you may not be able to age in place for your entire lifetime. Poor health outcomes might dictate a move to a retirement home at some point.
A paid off home is indeed a cornerstone to a solid retirement plan, but retirees should also consider tapping into their home equity by some measure to enhance their lifestyle and/or plan for extra healthcare costs in their later years.
One question for my homeowner readers – would you consider a reverse mortgage? Let me know in the comments.
This Week’s Recap:
Earlier this week I wrote about two types of overconfident investors.
Last week I was excited to share a conversation with Alexandra Macqueen and David Field, the authors of The Boomers Retire.
Alexandra was gracious enough to offer a free copy of the book to give away to a lucky reader who commented on the post. The winner of the book is “Kat” who commented on August 16th at 12:18pm. Congrats, Kat!
Promo of the Week:
Most bank managed portfolios come with mutual fund fees in the 2%+ range. Meanwhile, many investors aren’t interested or cut out for do-it-yourself investing.
A robo advisor is the perfect sweet spot between a fully managed investment portfolio and a self-directed option. With a robo, you can ditch the expensive mutual funds (which can add up to $10,000 or more each year on large portfolios) and still get a managed portfolio of low cost, globally diversified, and risk appropriate ETFs, plus access to a portfolio manager if you have questions or concerns.
The robo automatically monitors and rebalances your investments as you add new money and when markets move up and down.
Retirees in particular can benefit from the cost savings and automation that robo advisors provide. Think about it. Cost savings matter the most when your portfolio is at its largest. And, while there’s nothing complicated about the accumulation phase, the withdrawal phase in retirement is another matter altogether. When to convert your RRSP to a RRIF? How much to withdraw from each account every year? When to schedule those withdrawals (monthly, quarterly, annually)?
A robo advisor can help with all of this and more.
My go-to robo advisor is Wealthsimple, the largest robo-advisor in Canada. Clients with more than $100,000 to invest qualify for Wealthsimple Black, which comes with a reduced management fee of 0.40% plus some other perks.
Right now you can get a $50 bonus when you open and fund your first Wealthsimple account (min. $500 initial deposit). Sign up now to take advantage of this special offer.
Weekend Reading:
Our friends at Credit Card Genius look at the positive and negative changes made recently to Canada’s best credit card.
You might recognize Tomas Pueyo from his excellent COVID-19 coverage but he also worked for years in the financial advice industry and laid out a few things you need to know about how to invest.
Here’s Morningstar’s Christine Benz and Susan Dziubinski on why you should trial run your retirement.
Steadyhand’s Tom Bradley explains how investors can narrow the gap between their risk capacity and risk appetite.
Jason Heath answers a reader question on how much should you withdraw from your RRIF.
Peter Lazaroff discusses investing regret, including where regret comes from, why we experience it with our portfolio, and what to do about it.
Ramit Sethi talks about why we are so emotional about money in this Harvard Business Review interview:
“Our feelings are almost always unrelated to the financial decisions we make and indicative of something much deeper.”
Can you change your mind about money? Here’s why the biggest improvement you could make to your financial well being might be to reframe the way you think about money.
Jonathan Chevreau is rethinking the speculative component of his core and explore investing approach. I think more stock pickers should do this kind of honest self-reflection.
Here’s a fascinating conversation with one of my favourite writers, Morgan Housel from the Collaborative Fund:
Here’s Morgan Housel again looking back at three times history hung by a thread due to chance encounters.
Nine questions that A Wealth of Common Sense blogger Ben Carlson is pondering about the greatest bull market in his lifetime.
Investment advisor Markus Muhs with a scathing critique of market linked GICs – not now, not ever. Agree 100%.
A great resource here by Mark Walhout on investing inside a corporation.
Finally, here’s a nice piece by the Humble Dollar’s Don Southworth on the dreaded “b” word. He writes, “for too many people, a budget connotes pennypinching, financial claustrophobia and sacrifice.” But he’s convinced that budgets can change lives because a budget changed his.
Have a great weekend, everyone!
