One of the great modern day financial delusions is that the value of your home will help pay for your retirement.
This will not happen for most people. Face it now and start saving properly for your senior years using tax-free savings accounts or registered retirement savings plans.
The idealized sequence of events for homeowners moving into their post-retirement years: sell the family home for a vast profit, carve off a big chunk to generate investment income and use the rest to buy a small house or condo.
The reason why this won’t work is that we have a demographic bulge of retiring baby boomers who all plan to do more or less the same thing. This means those small homes and condos will be in strong demand for the next couple of decades. The result for retiring boomers is that they’ll sell the family home and end with not a lot left over after buying their next place of residence. Check out condo prices in your city. You may well notice that they’re not a lot cheaper than house prices.
Here’s another factor working against homes as a source of retirement income. As lifespans get longer, people will be spending more time living in their homes before downsizing. That’s a longer period of time before home equity can be accessed.
Naturally, the financial industry has solutions to the problem of unlocking home equity before you move. One is the reverse mortgage, where you borrow a limited amount against your equity and only repay that sum when you sell, along with interest that has piled up. Another is the home equity line of credit, where you borrow against your home equity and make at least the monthly minimum required payment (usually just the interest owing). Neither solution is ideal because you’ll be paying interest to use money you actually own but can’t get access to.
Still another reason to put aside the idea of your home financing your retirement is the uncertain outlook for the residential real estate. Long-time homeowners approaching retirement will still book major gains when they sell in the years ahead but, as 2013 began, there were forecasts in place for prices to fall as much as 10% or even 25%.
Think of your home as a financial asset that you’ll sell some day and use to buy your next place of residence. If there’s money left over for your retirement fund after that, call it a pleasant surprise.