Earlier this year, a survey finding released by Sun Life Financial made headlines: about 20 per cent of Canadians are now retiring with a mortgage. Given the financial planning axiom that it’s vital to pay off all debt before retirement, the survey naturally raised widespread concerns. But it’s critical to step back and consider both sides of the household balance sheet, because there are situations in which a mortgage can lower taxes and mean a more comfortable income, says Jeff Spencer, vice president of retail sales at Manulife Bank and Trust.
“We support advisers in creating cash flow plans that get their clients out of debt pre-retirement: how can you leverage tax strategies to maximize retirement savings, but at the same time pay off debt? One of the reason for doing it that way, however, is to make sure they are out of debt when they retire, so they can go back into debt after they retire,” he explains.
If that sounds shocking, it may be because you haven’t yet been exposed to Canada’s retirement tax system, in which OAS and GIS clawbacks can mean 100% taxation on some income.
“I’m not talking about borrowing $50,000 and investing it, but about using home equity to pay $200, $500 or $800 worth of monthly bills to lower taxable income or retain higher-return investment portfolios longer,” he says.
This strategy can effectively lower an individual’s tax rate throughout their retirement, he notes, but it requires finding the right home equity product. “A house is an investment, but you can’t sell it off in pieces. If you want to stay in your home, and most people do, your only means of liquidity is debt. With effective planning, it’s possible to proactively access that asset to pay the least amount of tax and maintain the highest returns throughout the entire portfolio of investments.”
In fact, Mr. Spencer adds, a number of studies have shown that the longer someone lives in their home, the longer their life expectancy. “From a planning perspective, anything that helps extend someone’s life and the time they spend with their families should be our number one priority.”
One of the features of Manulife Bank’s Manulife One product is the flexibility to pay off mortgage debt without penalties when cash flow increases before retirement, he points out. At the same time, homeowners can decide to retire and pay only interest if it is best for them from an overall planning perspective.
“When you look at it from a high level, the home is usually one of a retiree’s biggest non-taxable assets, and yet the traditional approach generally creates retirement cash flow from all of their taxable holdings first,” says Mr. Spencer. “This strategy changes the game.”
Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.