Why should not your property be your retirement plan?
Property prices have been in turmoil for a decade, led by big cities like Vancouver and Toronto, which means that owners of even humble homes are paper millionaires. For a surprising number of Canadians, rising property values have made the family home not only their greatest asset, but also their primary source of income for retirement.
A 2017 survey by the Ontario Securities Commission found that nearly half of Ontarians aged 45 and over expect real estate prices to rise to fund their retirement. The study also found that almost 60 percent of those surveyed had little or no retirement savings.
“It’s about it,” says Sarah Milton, account manager at Clearpoint Retirement Solutions in Edmonton. “If people aren’t saving up or starting late and haven’t built up a lot, it’s difficult to make ends meet.”
Most of her clients have company retirement plans, but she says only about 40 percent of Canadian employers have them available today, which obliges individuals to save for their retirement – or hope the house does the heavy lifting.
The house-rich retirement dilemma
That warm feeling homeowners get when prices rise around them in short, brutal bidding wars, may be comforting, but it doesn’t answer the real dilemma of the wealthy: how to monetize their one great good that they also live in.
“You can’t buy groceries with your Evestrough,” said Kurt Rosentreter, Portfolio Manager and Certified Financial Planner at Manulife Securities Inc. in Toronto.
Mr. Rosentreter, who has clients in Vancouver and the Toronto area, says some believe that the cash gain from selling their primary residence is not enough to both retire and buy a smaller space in their desired location . Many of his customers want to stay close to their community, friends, and family, and have access to good health care providers.
“What I find is that they are not scaling down enough to leave a capital base to combine with their existing savings that will fund the lifestyle they want,” he says.
He provides the example of a retired couple who sold their $ 2 million home and bought a $ 1 million apartment.
“You give me $ 1 million and I’ll put it into a balanced portfolio. I’m telling you to get 4 percent a year [$40,000 pretax]. You’re closer to the poverty line than the $ 120,000 a year you made three years ago. “
There are always solutions, he adds, but most of the clients nearing retirement don’t want to hear what they are. This includes moving from a larger city to a small town, drastically reducing their lifestyle in other ways, or even renting.
There is also the option of saving more, working longer, or a combination of the two, which often does not go down well either.
“You were left with no choice unless you work in a place where you have an annual pension of $ 100,000 or you married a teacher with a pension. Then you have more choices. “
More reasons your home is a bad retirement plan
The strategy of wagering the house will fund your retirement and also violate some general investment rules, including a lack of liquidity and diversification.
The wealthy couple with no retirement savings have only one illiquid asset that they may have to sell at a time that is not their choice, for example in a depressed real estate market. (Homes are generally the definition of an illiquid or hard-to-sell asset, although in today’s overheated Canadian markets, they sell more like cash like stocks and bonds.)
The other warning is that people shouldn’t have all of their retirement eggs in one basket.
“It’s not just an asset class. It’s on a street. It’s hard to be more focused, ”said Scott Plaskett, CEO of Ironshield Financial Planning in Toronto.
Mr. Plaskett says it is “extremely risky” to rely on your home value to help you retire.
The extremely low interest rates have fueled the current housing boom in much of the country – a phenomenon likely to be compounded by the economic downturn caused by the pandemic – but they may have reached their limits.
“There’s another shoe that has to fall,” says Mr. Plaskett. “Governments cannot print that much money without creating an inflationary environment. Ultimately, that will catch up with us, and the only way to contain inflation is to slowly raise interest rates. “
Warren Buffett said this month that his investment firm, Berkshire Hathaway, is now experiencing “very significant inflation”.
Higher interest rates will likely kill the housing boom and put the home retirement plan at risk.
“You run the risk of the value of your home actually falling until interest rates stabilize,” says Plaskett.
The home that is rich and the savings poor can potentially wait for a short-lived property market collapse by continuing to work after the scheduled retirement date or taking out a reverse mortgage or home loan. But these are all stop-gap measures.
Mr. Rosentreter from Manulife is vehemently against the idea of taking on new debt by borrowing against the equity of the home in order to prevent the real estate market from falling.
“You just lost [a chunk] of your home value. And now you want to add debt? No, ”he says. “[The] The reality is that when your home is your retirement plan and we have a major correction before you can downsize significantly [you need to] continue working. “