Here's a surprising addition to the list of obstacles to a financially secure retirement: Your home.
It has long been thought that equity in our homes will help pay for our retirements, but that's not going to happen for a lot of people. They simply won't accept the idea of selling or otherwise tapping into the equity in their houses, a new survey suggests. It's a shame because the same survey suggests people are going to need the money they have locked in the value of their homes.
The survey of 1,500 homeowners aged 50-plus was commissioned by the Investor Education Fund, the non-profit group behind the GetSmarterAboutMoney.ca website. (Full disclosure: I've done some guest blogging for them, and they co-sponsor our Let's Talk Investing video series.) Two standout findings: Two in 10 households had no clue how much they had put away for retirement, and half believed they will run out of money in the first 10 years.
Weak investment returns, high debt levels, low wage growth and the declining availability of company pensions are all obstacles to retiring comfortably. Now, we add houses to the list.
First, some people are still paying for their homes as they approach retirement. Of the four in 10 survey participants who still had a mortgage, only 30 per expected to have the debt paid off at retirement. For those who didn't get the memo, you're supposed to have your house paid off years ahead of retirement so your former mortgage payments can be redirected to savings.
You'd think the fatalism about retirement saving would prompt people to consider using their homes to supplement their retirement savings, but that's not the case for many. Half of the participants said they'd never thought about selling their home to generate retirement income, and four in 10 people were unwilling to consider any one of five possible ways to exploit the equity in their home.
The housing market has been a much more comfortable place to be than the stock market over the past five years, and this may have influenced the militant stay-at-home attitude of the survey participants. But the main reason seems to be lifestyle. In fact, six in 10 people said that staying in their home is critical to their quality of life.
If your retirement savings fall short, at least consider what your house can do for you. Here are the five options laid out in the survey:
1.) Sell, invest the proceeds and then rent: Because this can result in a large, investable chunk of money, it's an idea that has some merit, as long as you're comfortable with not being a homeowner any longer.
2.) Downsize and invest the leftover funds: The problem here is that many people won't have much left over if they move from a house to a condo. This might work best, however, if you move from a big city to a smaller community.
3.) Use a home-equity line of credit: This makes sense only if you're temporarily covering expenses that you know you can fully repay in fairly short order.
4.) Take out a reverse mortgage: Borrow now against the equity in your home, pay it back later or when you sell (read more here.)
5.) Rent out part of your house: This means strangers will be living in your home, but it provides a regular flow of cash through rent.
None of these choices are widely practical or palatable – you can see that in the unenthusiastic way people reacted to them in the survey. Downsizing had the most appeal, but it's the least effective in terms of turning home equity into useable cash. Selling and renting was the second most popular choice, but with only 24 per cent support in the survey.
Strangely, the home equity line of credit was a third choice, followed by renting out part of a home, and reverse mortgages. We have massive levels of household indebtedness in this country, and yet people are squeamish about using debt to help fund their retirement? This does not compute, especially in light of a recent report from Toronto-Dominion Bank showing the 65-plus demographic led the country last year in borrowing growth.
If you've saved well for retirement, then you've earned yourself the luxury of deciding what to do with your home based on lifestyle-related factors. If not, then it's time to get real about your house. It may be an obstacle to a financially secure retirement.