Thinking of using your home to fund your retirement?

Almost a quarter of Canadians say they are planning on using their homes as their primary source of income once they are out of the workforce, according to a survey from Sun Life Financial.

“It’s not something we would recommend per se, it is a bit of a surprise,” says Sadiq Adatia, chief investment officer of Sun Life Global Investments, about the retirement strategy being considered by 24% of Canadians. “People should be counting on their retirement savings and not really looking at their home. A home is something you can have and carry forward with you.”

Any retirement strategy involving accessing the equity of the home could mean selling it or at the very least getting a new mortgage on the property or a reverse mortgage.

Mr. Adatia thinks the downturn in the stock market in 2008 may have affected people’s retirement plans and has them turning to their homes to pick up the slack.

Rising home values have helped many Canadians approaching retirement feel like they have created a pretty big nest egg. The Canadian Real Estate Association said last month the average home in the country sold for $388,553 in January, a new high and a 9.5% increase from a year earlier.

On average, Canadians expect 10% of their retirement income to come from their home. Government pension plans on average are expected to supply 30% of retirement income, 27% is to come from personal savings, 23% from employer plans, 5% from inheritance and 6% from what is called other sources.

Even with their optimism over accessing their home equity, only 28% of Canadians expected to be retired by 66. Another 56% of Canadians expect to work past retirement age with 65% of those people saying they will need to.

“The average expected retirement age in Canada has hit its lowest level in four years – it’s 66 this year down from a high of age 69 in 2011,” said Kevin Dougherty, president of Sun Life Financial Canada. “With people living longer and more Canadians expecting to retire sooner, it’s important to look at what savings you will need to be fully prepared.”

Mr. Adatia thinks a retirement plan involving selling your home might work for people who bought a few years ago, it might not work for people buying today.

“I know my own parents bought their home 30 years ago and at an extremely dirt cheap price,” he said, adding the older people can afford to absorb a downtown in the market if it happens. “If you’re 40 and bought your home five years ago, you can’t afford that hit.”

Sun Life’s view on real estate is the market is inflated and there might be a significant decline in prices, making renting a viable option. The company says homes are selling for on average six times personal income, compared to a historical average of four times.

“Do you want to overextend yourself at the peak of the market?” said Mr. Adatia.

The survey was conducted by Ipsos Reid between Nov. 12 to Nov. 20 and is considered accurate to within two percentage points.

Source: Garry Marr, Financial Post

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