Owning a home is a great way to amass wealth and to save for the future, but it shouldn’t be the only egg in your retirement basket. This is especially true if your timeline to retirement is on the short side.
According to a survey by the Ontario Securities Commission (OSC) of respondents within 20 years of retirement:
- Most of the respondents indicate that their financial concerns are retirement-related, with having enough money in retirement, having enough money for essentials today and managing current debt loads rounding out the top three.
- 45 per cent of pre-retired homeowners are counting on the value of their home rising in order to fund their retirement.
“Some areas in Canada, like Toronto and Vancouver, have seen property values skyrocket in the last decade, which have given a number of homeowners a false sense of “wealth”. If your debt is low and the asset value has grown in your home over time, then you’ll be able to tap into that when you sell,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
“However, relying on your home increasing in value to fund your retirement as your only savings is a risky proposition. There are a lot of factors in real estate that are beyond your control, which may mean that, when you need it, that nest egg won’t be there like you think it is,” says Schwartz.
Here are some tips to plan your financial security and avoid taking on debt in your retirement.
Make a smart housing buy
In cities like Toronto and Vancouver, where property values are high and maxing out your mortgage is the cost of homeownership, it is extremely unwise to assume that real estate will climb at the same rate to offset your mortgage debt. It’s even more unwise to count on this happening in order to pay for your retirement.
Real estate works in cycles. For instance, while still a hot market, Toronto’s property values have still pulled back in the last few months. They may continue to do so. Add to this the fact that interest rates have just gone up and are likely to again, the equity that you are expecting may be a whole lot less than your calculations.
If you are house hunting right now, in order to avoid this problem, keep your mortgage low so that you can better sustain any ups and down in the market.
Keep your cash flow going
If buying a home is like forced savings, it’s ok to take out a big mortgage right? Not so.
You can’t be spending all of your income making mortgage payments. You need to be able to put money into retirement savings and into short term savings to avoid taking out debt in the case of an emergency.
If all your income is going towards your mortgage, not only will you not be able to save for your retirement, you’ll accumulate debt to carry into retirement.
Home equity+ diversified savings = financial security
In order to ensure that you’ve got a retirement fund, you’ve got to diversify into other types of savings like cash. Use your home equity as a portion of your savings plan, but use cash and other more liquid savings too.
If you’ve got liquid savings on hand, you’ve got more control over when you sell your home and take the equity out to fund your savings. You can decide when the time in your life and the time in the market is right.