Your home and your retirement

Buying a home and paying a mortgage is a form of savings. As you pay down your mortgage, you build up equity in your home. But this kind of "savings" isn't like other kinds of savings: it is highly illiquid and it's the roof over your head. 

You may have seen articles with the headline "Your home is not your retirement plan", which cite these reasons why you can't rely on your home to fund your expenses in retirement. And it's absolutely true: relying solely on your home to fund your retirement is risky. You need to save in other ways too. 

Having said that, you also should not ignore the equity in your home when putting together your retirement plan. Realistically, if you live in Toronto (or other cities where house prices are high), selling your family home and moving into a smaller place or somewhere outside of the city is likely to leave you with extra money.

Incorporating your home equity into your plan can make a real difference in how much you need to save now and to the decision of when you can retire. 

Excess funds from your home

Here is one way of looking at it. When I am preparing retirement plans for clients who are homeowers, I like to calculate how much of the equity in the existing home will be needed to pay for a new place to live once it is sold. How long can the proceeds from the sale pay for their rent? 

Here is what that looks like:

In many cases, selling a home at age 65, 80 or 90 will produce enough cash to pay for rent until age 95, with money left over. This excess money is then included in the retirement plan to reduce the amount the retiree needs to take from their RRSPs and TSFAs. We can do a similar analysis that assumes the homeowner buys a less expensive home instead of renting.

Give yourself some wiggle room

Ignoring the fact that you might have extra money from the sale of your home isn’t doing you any favours. If you live in a high-priced housing market like Toronto, it is probably overly conservative. Why deny yourself the wiggle room just because you don’t want to assume the housing market will continue to rise, or that you will be able to downside your living space?

There’s a pretty good chance that both of these things will happen, leaving money to pay for other things.

Take care of yourself (and your money),

Anita Bruinsma

Clarity Personal Finance

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